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Exclusive contracts foster relationship-specific investment

de Meza, David and Selvaggi, Mariano (2007) Exclusive contracts foster relationship-specific investment. RAND Journal of Economics, 38 (1). pp. 85-97. ISSN 0741-6261

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Abstract

Exclusive contracts prohibit one or both parties from trading with anyone else. Contrary to earlier findings, we show that investments that are specific to the contracting parties may be encouraged by exclusivity. Results depend on the nature of investments and the bargaining solution. The major part of the analysis shows that exclusivity deals designed to “assure” the supply of essential inputs promote investment. Infinite penalties for breach, even if ex post renegotiable, may result in excessive investment, in which case a positive but finite damage payment yields the first-best outcome.

Item Type: Article
Additional Information: © 2007 RAND
Library of Congress subject classification: H Social Sciences > HG Finance
Sets: Research centres and groups > Managerial Economics and Strategy Group
Departments > Management
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 10 May 2011 13:39
URL: http://eprints.lse.ac.uk/35929/

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