Buyer-Option Contracts, Renegotiation, and the Hold-Up Problem
2004, Journal of Law, Economics, and Organization
Tom P. Lyon, Eric Bennett Rasmusen
"Buyer-option" contracts, in which the buyer selects the product variant to be traded and chooses whether to accept delivery, are often used to solve holdup problems. We present a simple game that focuses sharply on subgames in which the buyer proposes inefficient actions in order to improve his bargaining position. We argue for one of several alternative ways to model this situation. We then apply that modeling choice to recent models of the foundations of incomplete contracts and show that a buyer-option contract is sufficient to induce first-best outcomes. Copyright 2004, Oxford University Press.
Rasmusen, Eric Bennett and Thomas P. Lyon (2004), "Buyer-Option Contracts, Renegotiation, and the Hold-Up Problem,'' The Journal of Law, Economics and Organization, Vol. 20, No. 1, April, 148-169.