Working Paper: NBER ID: w16929
Authors: Oliver D. Hart
Abstract: We analyze noncontractible investments in a model with shading. A seller can make an investment that affects a buyer's value. The parties have outside options that depend on asset ownership. When shading is not possible and there is no contract renegotiation, an optimum can be achieved by giving the seller the right to make a take‐it‐or‐leave‐it offer. However, with shading, such a contract creates deadweight losses. We show that an optimal contract will limit the seller's offers, and possibly create ex post inefficiency. Asset ownership can improve matters even if revelation mechanisms are allowed.
Keywords: noncontractible investments; reference points; asset ownership; contract design
JEL Codes: D23; D86; K12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| asset ownership (H82) | investment incentives (O31) |
| contract design (K12) | investment behavior (G11) |
| shading (Y60) | deadweight losses (H21) |
| asset ownership (H82) | shading (Y60) |
| optimal contract (D86) | investment incentives (O31) |
| optimal contract (D86) | ex post efficiency (D61) |
| optimal contract (D86) | shading (Y60) |