IJIMT 2017 Vol.8(2): 100-105 ISSN: 2010-0248
doi: 10.18178/ijimt.2017.8.2.711

Contract Design, Relationship-Specific Investment and Renegotiation

Wenmin Peng
Abstract— This paper focuses on the contract design in which the buyer offers a price-quantity contract and the seller makes a relationship-specific investment. We introduce the regulating mechanism between the price and trade level into the setting of buyer’s optimal contract that can maximize her payoff taking into account the seller’s investment incentive. The result shows that renegotiation can enhance the cooperation efficiency by mitigating the problem of underinvestment. But the asymmetric information of outside option reduces the efficiency of ex-ante contract.

Index Terms— Hold-up, outside option, renegotiation, relationship-specific investment.

Wenmin Peng is with the Southwest Jiaotong University, China (e-mail: wenminpeng@163.com).

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Cite: Wenmin Peng, " Contract Design, Relationship-Specific Investment and Renegotiation," International Journal of Innovation, Management and Technology vol. 8, no. 2, pp. 100-105, 2017.

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