Buyer-Option Contracts Restored: Renegotiation, Inefficient Threats, and the Hold-Up Problem

Posted: 19 Nov 2003

See all articles by Thomas P. Lyon

Thomas P. Lyon

University of Michigan, Stephen M. Ross School of Business

Eric Bennett Rasmusen

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Abstract

'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.

Suggested Citation

Lyon, Thomas P. and Rasmusen, Eric Bennett, Buyer-Option Contracts Restored: Renegotiation, Inefficient Threats, and the Hold-Up Problem. The Journal of Law, Economics, and Organization, Vol. 20, No. 1, pp. 148-169, 2004, Available at SSRN: https://ssrn.com/abstract=469903

Thomas P. Lyon

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
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Eric Bennett Rasmusen (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

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Bloomington, IN 47401
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HOME PAGE: http://rasmusen.org

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