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

Posted: 29 Feb 2008

See all articles by Thomas Patrick Lyons

Thomas Patrick Lyons

affiliation not provided to SSRN

Eric Bennett Rasmusen

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

Date Written: April 2004

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

Lyons, Thomas Patrick and Rasmusen, Eric Bennett, Buyer-Option Contracts Restored: Renegotiation, Inefficient Threats, and the Hold-Up Problem (April 2004). The Journal of Law, Economics, and Organization, Vol. 20, Issue 1, pp. 148-169, 2004, Available at SSRN: https://ssrn.com/abstract=1095614 or http://dx.doi.org/10.1093/jleo/ewh027

Thomas Patrick Lyons (Contact Author)

affiliation not provided to SSRN

Eric Bennett Rasmusen

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

2810 S Dale Ct,
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HOME PAGE: http://rasmusen.org

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