TY  - JOUR
AU  - Hart,Oliver D.
TI  - Noncontractible Investments and Reference Points
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16929
PY  - 2011
Y2  - April 2011
UR  - http://www.nber.org/papers/w16929
L1  - http://www.nber.org/papers/w16929.pdf
N1  - Author contact info:
Oliver D. Hart
Department of Economics
Littauer Center 220
Harvard University
Cambridge, MA 02138
Tel: 617/496-3461
Fax: 617-495-7730
E-Mail: ohart@harvard.edu
AB  - We analyze noncontractible investments in a model with shading. A seller can make an investment that affects a buyer’s value. The parties have outside options that depend on asset ownership. When shading is not possible and there is no contract renegotiation, an optimum can be achieved by giving the seller the right to make a take‐it‐or‐leave‐it offer. However, with shading, such a contract creates deadweight losses. We show that an optimal contract will limit the seller’s offers, and possibly create ex post inefficiency. Asset ownership can improve matters even if revelation mechanisms are allowed.
ER  -