American Economic Review: Vol. 89 No. 1 (March 1999)


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Cooperative Investments and the Value of Contracting

Article Citation

Che, Yeon-Koo, and Donald B. Hausch. 1999. "Cooperative Investments and the Value of Contracting." American Economic Review, 89(1): 125-147.

DOI: 10.1257/aer.89.1.125


Recent articles have shown that contracts can support the efficient outcome for bilateral trade even in the face of specific investments and incomplete contracting. These studies typically considered 'selfish' investments that benefit the investor (e.g., the seller's investment reduces her production costs). The authors find very different results for 'cooperative' investments that directly benefit the investor's partner (e.g., the seller's investment improves the buyer's value of the good). Most importantly, if committing not to renegotiate the contract is impossible, then contracting has no value, i.e., the parties cannot do better than to abandon contracting altogether in favor of ex post negotiation.

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Che, Yeon-Koo (U WI)
Hausch, Donald B. (U WI)

JEL Classifications

L14: Transactional Relationships; Contracts and Reputation; Networks
C70: Game Theory and Bargaining Theory: General
J41: Labor Contracts
L22: Firm Organization and Market Structure

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