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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

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Type
Document de travail / Working paper
Date
2011
Publisher
Université Paris-Dauphine
Published in
Paris
Pages
23
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Author(s)
Villeneuve, Bertrand cc
Durand-Viel, Laure
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 / Keywords
Long-term contracts; Incomplete contracting; Infrastructure investment
JEL
D42 - Monopoly
D45 - Rationing; Licensing
D92 - Intertemporal Firm Choice, Investment, Capacity, and Financing
L95 - Gas Utilities; Pipelines; Water Utilities