Strategic Capacity Investment under Holdup Threats: The Role of Contract Length and Width
Villeneuve, Bertrand; Durand-Viel, Laure (2011), Strategic Capacity Investment under Holdup Threats: The Role of Contract Length and Width. https://basepub.dauphine.fr/handle/123456789/2859
TypeDocument de travail / Working paper
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Abstract (EN)This article analyzes the impact of the length of incomplete contracts on investment and surplus sharing. In the bilateral relationship explored, the seller controls the input and the buyer invests. With two-part tariffs, the length of the contract is irrelevant: surplus is maximal and goes all to the seller. If total surplus is targeted, or if sellers are left free, contracts will be as short as possible. If regulators want to favor buyers, prohibibiting nonlinear pricing and forcing long contracts are the best solutions. The interaction of a restriction (width) with another (length) is explained in detail.
Subjects / KeywordsLong-term contracts; Incomplete contracting; Infrastructure investment
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