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On simple contracts, renegotiation under asymmetric information, and the hold-up problem

Schmitz, Patrick W. (2002): On simple contracts, renegotiation under asymmetric information, and the hold-up problem.

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Abstract

In this paper it is demonstrated that voluntary bargaining over a collective decision under asymmetric information may well lead to ex post efficiency if the default decision is non-trivial. It is argued that the default decision may be interpreted as a 'simple' contract that the parties have written ex ante. This result is used in order to show that simple unconditional contracts which are renegotiated may allow the hold-up problem to be solved, even if the parties' valuations are private information.

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