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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