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We study legal restrictions on private contracting in the form of limitations on the severity of non-monetary punishments. We locate the rationale for such restrictions in externalities that parties impose on future relationships: punishments that lower an agent's future productivity may lower...
Persistent link: https://www.econbiz.de/10005699686
is better off if she grants the agent the option to walk away from the contract. By doing so, the principal is implicitly … contract theory literature that the exit option reduces the principal’s welfare, while protecting the agent. Our result is …
Persistent link: https://www.econbiz.de/10005129818
When a seller gives a buyer a right of first refusal, although it reduces the competing buyers' profits and creates an inefficiency, it always increases the joint profit of the seller and the right holder. Right of first refusal with a consideration (e.g., a payment from the right holder to the...
Persistent link: https://www.econbiz.de/10005342352
The present article provides an economic analysis to examine how contract damages affects both breach and investment … decisions over time. Unlike the standard static model, this article studies a model in which, upon signing a contract, a seller … investigate investment dynamics under alternative contract damages. First, under expectation damages, the seller has an incentive …
Persistent link: https://www.econbiz.de/10005342380
contract specifying a price and quantity of the final good to be traded will, fairly generally, induce efficient investments if …, 1996). Second, and in contrast, no contract however complicated is of any value in reducing the inefficiency if the …). We show that courts of law may play a more important role in real contract disputes than has been realized. The key …
Persistent link: https://www.econbiz.de/10005328878
This paper analyzes a bilateral trade problem where the seller makes hidden investment that influences the buyer's private valuation. Complete contracts can be written on observable trade decisions. It is shown that efficiency level in investment and trade is negatively related to the scope of...
Persistent link: https://www.econbiz.de/10005063600
This paper reports a laboratory experiment to study pricing and advertising behavior in a market with costly buyer search. Sellers simultaneously post prices and decide whether or not to incur an exogenous cost to advertise their price. Sellers are not capacity constrained, and each buyer...
Persistent link: https://www.econbiz.de/10005063675
This paper shows that monitoring too much a partner in the initial phase of a relationship may not be optimal if the goal is to determine his loyalty to the match and if the cost of ending the relationship increases over time. The intuition is simple: by monitoring too much we learn less on how...
Persistent link: https://www.econbiz.de/10005063690
This paper is an adaptation of the Chamley-Gale endogenous-timing information-revelation model of investment (Econometrica 1994). It models a game with pure informational externality where agents can learn by observing others' actions. The social learning can result in herding and possibly in an...
Persistent link: https://www.econbiz.de/10005063698
A firm can merge with one of n potential partners. The owner of each firm has private information about both his firm's stand-alone value and a component of the synergies that would be realized by the merger involving his firm. We characterize incentive-efficient mechanisms in two cases. First,...
Persistent link: https://www.econbiz.de/10005699650