Events

Authors:

• Joel WATSON
  University of California, San Diego

• Chris WIGNALL
  University of California, San Diego

We examine a contractual setting with unverifiable investment and a durable trading opportunity, where trade can take place in any one of an infinite number of periods. We compare this setting with one in which the opportunity to trade is nondurable and we show that the outcomes supported in the nondurability setting can also be supported in the durability setting. Thus, durability does not contribute to the hold-up problem in the environment we study, contrary to the message of the recent literature. In our class of examples, simple open-ended option contracts suffice to induce efficient investment. Furthermore, unique implementation is achieved with a specific nonstationary option contract. Our model also allows us to clarify (in fact, discount) the role of the “outside option principle” in the analysis of contractual relationships.