TY  - JOUR
AU  - Edlin,Aaron S.
AU  - Reichelstein,Stefan
TI  - Holdups, Standard Breach Remedies, and Optimal Investment
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5007
PY  - 1997
Y2  - May 1997
UR  - http://www.nber.org/papers/w5007
L1  - http://www.nber.org/papers/w5007.pdf
N1  - Author contact info:
Aaron Edlin
The Richard W. Jennings '39 Endowed Chair
University of California, Berkeley
Department of Economics and School of Law
Berkeley, CA   94720-7200
Tel: 510/642-4719
Fax: 510/642-3767
E-Mail: edlin@econ.berkeley.edu

Stefan Reichelstein
Graduate School of Business
Stanford University
Stanford, CA  94305
E-Mail: Reichelstein_Stefan@gsb.stanford.edu
AB  - We consider a bilateral trading problem in which one or both parties makes relationship-specific investments before trade.  Without adequate contractual protection, the prospect of later holdups discourages investment.  We postulate that the parties can sign noncontingent contracts prior to investing, and can freely renegotiate them after uncertainty about the desirability of trade is resolved. We find that such contracts can induce one party to invest efficiently when either a breach remedy of specific performance or expectation damages is applied.  Specific performance can also induce both parties to invest efficiently, provided a separability condition holds.  In contrast, expectation damages is poorly suited to solve bilateral investment problems.
ER  -