Noncontractible Investments and Reference Points
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.
I would like to thank Philippe Aghion for stimulating conversations that led me to write this paper. I am also grateful to Maija Halonen, Richard Holden, John Moore, and Philipp Weinschenk for helpful comments, and to Cathy Barrera for research assistance. Financial support from the U.S. National Science Foundation through the National Bureau of Economic Research is gratefully acknowledged. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Oliver Hart, 2013. "Noncontractible Investments and Reference Points," Games, MDPI, Open Access Journal, vol. 4(3), pages 437-456, August. citation courtesy of