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Contractual signaling,relationship-specific investment and exclusive agreements
Institution:1. University of Essex, UK;2. Nova School of Business and Economics, Portugal;1. University of Heidelberg, Germany;2. University of Amsterdam and Tinbergen Institute, The Netherlands;1. Department of Government, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, United Kingdom;2. Faculty of Engineering, Information and Systems, University of Tsukuba, 1-1-1 Tennodai, Tsukuba, Ibaraki 305-8573, Japan;3. WZB Berlin Social Science Center, Reichpietschufer 50, D-10785 Berlin, Germany;4. Department of Economics, University of Heidelberg, Bergheimer Str. 58, 69115 Heidelberg, Germany;1. University of Cologne, Department of Economics, Albertus-Magnus Platz, D-50923 Cologne, Germany;2. Department of Economics, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, United Kingdom
Abstract:I analyze a model of hold-up with asymmetric information at the contracting stage. The asymmetry of information concerns the value of trade with external parties. I show that contractual signaling and efficiency of investment can conflict if only quantity is contractible. This conflict generates inefficient equilibria in terms of investment. Contracting on exclusivity in addition to quantity resolves the conflict and consequently eliminates the inefficiency of investment.
Keywords:Relationship-specific investment  Asymmetric information  Exclusivity
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