Exclusive contracts prohibit one or both parties from trading with anyone else. Contrary to earlier findings, notably Segal and Whinston (2000), we show that investments that are specific to the contracted parties may be encouraged. Results depend on the nature of the investments and whether the...

Why do irreplaceable firms with a choice of suppliers or customers deliberately expose themselves to the threat of hold up by contracting ex ante to deal with only one of them? Our explanation revolves around the multiple equilibria intrinsic to situations of unverifiable investment and many...