SFB 303 Discussion Paper No. B - 211

Author: Nöldeke, Georg, and Klaus M. Schmidt
Title: Unverifiable Information, Incomplete Contracts, and Renegotiation
Abstract: Hart and Moore (1988) argued that non-verifiability is a major cause for contract imcompleteness and leads in general to underinvestment if the parties can not commit not to renegotiate their initial contract. We show that this result relies on the assumption that the courts cannot distinguish which party refused to trade. If this assumption is relaxed the first best can be achieved by giving control to one party which can decide unilaterally whether or not to enforce trade. Our result suggests that if relationship specific investments are non-verifiable, then vertical integration may perform better than separate ownership.
Keywords: Incomplete Contracts, Renegotiation, Verifiability
Creation-Date: February 1992
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