the hold up problem in government contracting a two period procurement model is considered in an incomplete contract framework in contrast to o hart and j moore 1988 the welfare maximizing government as the buyer is able to accomplish ex ante optimal contracts which guarantee first best specific investments of both buyer and seller these contracts are precisely characterized regardless of the underlying supports of cost and benefit distributions renegotiation inevitably occurs in some states of nature this renegotiation always increases the ex ante fixed trade price hence the empirical observation of soft budget constraints in government contracting can be rationalized furthermore in accordance with common beliefs the seller s rents accrue only at the production stage copyright 1996 by the editors of the scandinavian journal of economics

optimal allocation of ownership rights in dynamic r d alliances we explore the dynamic evolution of property rights regimes in r d alliances using the incomplete contract approach pioneered by grossman hart and moore in contrast to the standard analysis the productive asset is an excludable public good such as a patent moreover both firms can decide whether to disclose their know how and invest effort know how that has once been released cannot be concealed later we characterize different scenarios in which the optimal ownership structure may change over time due to a trade off between inducing know how disclosure and ensuring maximum effort

investments holdup and the form of market contracts the authors analyze incomplete contracts to induce efficient investment with exogenous switching costs fixed price contracts are efficient generate some rigidity in prices are renegotiated intermittently by possibly small amounts and when inflation is positive generate asymmetric responses to shocks all consistent with evidence on prices and wages with two sided specific investments efficiency requires prices to have sufficient escalator clauses to avoid renegotiation as observed in many long term contracts a third case with one sided specific investments can generate take or pay contracts and explain why firms sometimes pay for specific investments that appear to benefit employees directly

government spending and private consumption this paper investigates the macroeconomic effects of anticipations about future fiscal expenditures within a simple perfect foresight general equilibrium model this paper extends s djajic 1987 by investigating an anticipated permanent increase in government spending an anticipated permanent increase may temporarily stimulate capital accumulation the questions of whether anticipated or unanticipated changes in government spending have a larger effect on capital accumulation and output is related to the questions of whether government spending is initially above or below the optimal level

renegotiation design with unverifiable information this paper considers a buyer seller relationship with observable but unverifiable investments and or random utility parameters in such situations it is known that contract renegotiation may prevent the implementation of first best outcomes in this paper we show however that efficient investments and optimal risk sharing can typically be achieved provided the initial contract is able to monitor the ex post renegotiation process specifically we focus on the following two features of renegotiation design first default options in case renegotiation breaks down second the allocation of all bargaining power to either contracting party moreover we show that these two features can be obtained in standard rubinstein bargaining games through contractual provisions such as specific performance clauses and penalties for delay or equivalently financial hostages refundable without interest

renegotiation design and contract solutions to the hold up problem abstract this paper surveys the literature on contractual solutions to the hold up problem which has addressed the issue of how to design the optimal contractual arrangement to achieve efficient investments in the presence of contract incompleteness although scholars have argued that renegotiation design is a necessary condition to avoid the hold up problem some recent papers have seriously questioned this condition we mainly show that renegotiation design remains a necessary condition to implement efficient investments

government spending and the optimal rates of consumption and capital accumulation this paper investigates the effects of a temporary change in government expendit ure on private consumption and investment the model employed is one of a closed economy populated by infinitely lived utility maximizing individuals the analysis focuses on the implications of alternative assumptions concerning the relationship between public and private c onsumption in the household s utility function a temporary increase in government expenditure is found to reduce investment if public and private goods are edgeworth complements or independent however if they are substitutes there exists the possibility of an increase in investment

output effects of government purchases the theoretical analysis focuses on the distinction between temporary and permanent movements in government purchases under plausible conditions the temporary case involves an output response that is positive less than one to one with the change in government purchases and larger than that generated by an equal sized but permanent shift in purchase the equilibrium real rate of return rise in the temporary case but changes little in the permanent one defense purchases are divided empirically into permanent and temporary components by considering the role of temporary wars no temporary shifts in nondefense purchases were isolated empirical results verify an expansionary output effect for temporary purchases that exceeds that of permanent purchases the results for some other expectational hypotheses are found to be generally supportive of the theory

government spending endogenous labor and capital accumulation following turnovsky and fisher 1995 journal of economic dynamics and control 19 747 786 we reexamine the dynamic responses of the capital stock to an unanticipated temporary increase in government consumption and infrastructure expenditures the key factors determining capital accumulation are endogenous labor the duration of policy expansion and the relationship between private decisions and the composition of public expenditure given that private decisions and public consumption are edgeworth independent if employment is variable investment increases with the duration of fiscal expansion following a temporary public infrastructure expansion there always exists the possibility of a decrease in investment before the fiscal reversion under fixed employment however a temporary public infrastructure expansion under variable employment leads to a likely increase in investment before the fiscal reversion

can government purchases explain the recent u s net export deficits abstract this paper investigates the role of u s government purchases in explaining recent u s net export behavior i develop a two country neoclassical model that emphasizes linkages from government purchases to consumption i compare the model s implications for the movements and co movements of net exports against their data counterparts a parameterization in which government purchases and private consumption are complements and in which expectations of future government purchases are revised downward can account for much of the time path and co movements of net exports i conclude that u s government purchases play some role in explaining recent u s net export behavior

timing of investments holdup and total welfare abstract we explore holdup with simultaneous and sequential investment with simultaneous investment both investors are held up with sequential investment contracting becomes possible after the project has commenced so the second investor avoids being held up if the investments are independent sequential investment increases cost of delay reduces the incentive for the first player to invest and increases the second player s incentive to invest the paper shows the timing of investment can act as an additional form of holdup if they have the option when to invest a party may choose the regime that does not maximize total welfare

can coasean bargaining justify pigouvian taxation the fact that according to the celebrated coase theorem rational parties always try to exploit all gains from trade is usually taken as an argument against the necessity of government intervention through pigouvian taxation in order to correct externalities however we show that the hold up problem which occurs if non verifiable investments have external effects and parties cannot be prevented from always exploiting ex post gains from trade through coasean bargaining may be solved by government intervention in this sense the impossibility of ruling out coasean bargaining after investments are sunk may in fact justify pigouvian taxation

delegating the decision making authority to terminate a sequential project abstract this paper considers a two stage project which requires investments to be made by different agents who have career concerns at each stage the principal needs to decide whether the project should be continued or not after the first stage outcome is realized the principal can either keep the decision making authority regarding the termination policy or else delegate it to one of the agents with career concerns the first stage agent always wants to continue the project in which case the sunk cost fallacy occurs on the contrary the second stage agent may prefer to stop it voluntarily to protect his reputation therefore when the career concerns are strong the principal should delegate the authority to the second stage agent if an early termination of the project is also the best policy for the principal while if the career concerns are weak the principal should keep the authority

decentralization and the composition of public expenditure in spain gonzalez alegre j decentralization and the composition of public expenditure in spain regional studies this paper examines the effects of fiscal decentralization on the economic distribution of public expenditures using panel data from the seventeen spanish regions 1984 2003 it is shown that fiscal decentralization is a crucial determinant of the share of the public budget devoted to capital the estimation run is based on a model in which the utility of the representative agent from the current public expenditure depends on the distance to the level of the administration that provides it that could be the cause why decentralized economies experience a higher share of current expenditure in the budget of the public administrations gonzalez alegre j la decentralisation et la structure des depenses publiques en espagne regional studies cet article cherche a examiner l impact de la fiscalite decentralisee sur la distribution economique des depenses publiques a partir des donnees provenant d une

holdups standard breach remedies and optimal investment in bilateral trading problems the parties may be hesitant to make relationship specific investments without adequate contractual protection we postulate that the parties can sign noncontingent contracts prior to investing and can freely renegotiate them after information about the desirability of trade is revealed we find that such contracts can induce one party to invest efficiently when courts impose either a breach remedy of specific performance or expectation damages moreover specific performance can induce both parties to invest efficiently if a separability condition holds expectation damages on the other hand is poorly suited to solve bilateral investment problems forthcoming the american economic review please contact the program in law and economics at boalt hall school of law uc berkeley berkeley ca 94720 for a copy of this paper

the hold up problem in a repeated relationship abstract much of the literature on what determines the scope of operations of a producer has centered on the hold up problem the standard results indicate the hold up problem may lead to suboptimal investments and therefore integration may improve the organization of production in this paper we consider a repeated relationship with durable investments and show the possibility of integration improves the choice of investments and there is no integration in equilibrium the equilibrium contract is non exclusive in order to allow the buyer to choose integration in later periods we derive this result in the presence of very simple and incomplete contracts

incomplete contracts the hold up problem and asymmetric information abstract given symmetric information in a standard hold up problem a buyer s investment incentives are always increasing in his bargaining power while this result is robust under one sided private information it can be overturned under two sided private information

evaluating irish industrial policy in terms of deadweight and displacement a quantitative methodological approach evaluation should consider what would have happened in the absence of assistance to produce an assessment of this counter factual scenario involves considering the twin concepts of deadweight and displacement an evaluative framework is developed for measuring the impact of grant assistance to individual firms logit regression analysis is used to estimate predictive models for deadweight and displacement the data were gathered during face to face interviews with the managing directors of firms that received grants from shannon development in the shannon region of ireland self assessment approach the objective was to establish whether certain characteristics of grant assisted firms can predict probable deadweight and displacement effects in the case of deadweight it was found that grant type size of firm whether investment appraisal carried out by firm included grant received and whether firm was a first time or repeat grant recipient all impact on the level of deadweight regarding displacement

after you sir hold up direct externalities and sequential investment we propose a solution to the hold up problem the parties in a contract can avoid the inefficiencies caused by the possibility of opportunistic behaviour and implement the first best level of investment if they make their investment decision sequentially one party observing the choice made by the other party before making his own choice unlike the existing literature the proposed solution leads to the efficient choice of investment even when there are two sided direct externalities journal of economic literatureclassification numbers d23 d82

government spending interest rates and capital accumulation in a two sector model this paper investigates dynamic impacts of a temporary fiscal expansion in a two sector growth model if the expansion falls on consumption investment commodities capital accumulation can be either promoted or reduced and the short term interest rate unambigu ously rises if the expansion falls on consumption commodities capital accumulation is crowded out and the short term interest rate declines during the period of the fiscal expan sion it is also shown that fiscal spending on the consumption commodity can move the short and long term interest rates in opposite directions jel classification e43 e62 041

an evaluation of eu regional policy do structural actions crowd out public spending motivated by the lack of success of previous studies trying to estimate the impact of the european cohesion policy this paper brings an unexplored issue to light transfers that are intended to finance public investment in key areas for growth might be crowded out by subsidized governments to alternative uses in fact using annual data from fifteen member countries 1993 2005 we conclude that public investment in the member countries makes up around 60 of the increase in eu funds the limited role of the european commission in the allocation of the funds could partially explain this result

ownership access and sequential investment we extend the property rights framework to allow for a separation of the ownership rights of access and veto and sequential investment parties investing first ex ante do so before contracting is possible parties that invest second ex post can contract on at least some of their investment costs along with this cost sharing effect the incentive to invest is affected by a strategic effect generated by sequential investment together these effects can overturn some of the predictions of the property rights literature for example the most inclusive ownership structure might not be optimal even if all investments are complementary

renegotiation of sales contracts this paper studies moral hazard contracts that may be renegotiated after an agent chooses an unobservable effort unlike in previous models a contract here contains only one compensation scheme and the agent has all the bargaining power in the renegotiation stage using a relatively weak forward induction refinement all equilibria are shown tb be second best efficient renegotiation occurs in every equilibrium if the effort set is rich the only equilibrium initial contract is a sales contract i e a scheme which sells the project to the agent this captures the idea that a party the principal who has an inherently weak renegotiation position will sometimes insist on a simple initial contract

incomplete contracts specific investments and risk sharing an optimal contract design problem is considered contracts which are incomplete and simple are used to investigate the extent to which constrained revisions can mitigate inefficiencies resulting from contractual incompleteness an optimal contract is characterized in two cases first when a contract is being used to facilitate trade between two risk neutral parties who must make relationship specific investments it is possible to implement the first best by a simple contract second when a contract is being used to share risk it is generally not possible to implement the first best when one party is risk neutral however it is possible to implement the first best by assigning all the ex post decision rights to that party

the composition of government expenditure and its consequences for macroeconomic performance abstract this paper employs the intertemporal optimizing market clearing framework to compare the effects of government consumption expenditure and government infrastructure expenditure on macroeconomic adjustment and performance particular attention is focused on the time path of the capital stock and its adjustment to both permanent and temporary changes in government expenditure are considered we show how the effects of both forms of government expenditure on economic welfare can be broken down into 1 i a direct crowding out effect and 2 ii a second component which describes the intertemporal tradeoffs between the short run rate of capital accumulation and the resulting change in the capital stock

an intertemporal model of saving and investment this paper characterizes a market economy with infinitely long lived consumers and value maximizing firms which face costs of adjustment for capital the temporary equilibrium of this economy is similar to the short run equilibrium of standard macroeconomic models consumption is a function of wealth investment is related to the value of firms equilibrium between aggregate demand and aggregate supply is achieved by the endogenous adjustment of the sequence of current and future interest rates the dynamic behavior of output consumption and investment in this economy is the same as in an optimal growth model with adjustment costs the paper shows this equivalence and then uses it together with the equivalence of taxes to technological shocks to study the dynamic effects of fiscal policy

government spending and capital accumulation with endogenous time preference this paper extends s djajic 1987 to allow for an endogenous rate of time preference and reexamines djajic s experiment how the optimal rates of private consumption and capital accumulation will respond to an unanticipated temporary expansion in government spending the key factors determining the adjustment patterns are the difference between the marginal utility of private consumption and that of public spending the timing of policy reversion and the relationship between private and public consumption in household utility if private and public consumption are edgeworth independent whether investment increases with the length of fiscal expansion depends on whether the marginal utility of private consumption exceeds that of public consumption

hold up and sequential specific investments we explore the hold up problem when parties can make investments simultaneously or sequentially sequencing of investments can allow some projects to proceed that would not be feasible with a simultaneous regime however a cost of sequencing is that it can disadvantage some parties reducing their incentive to invest the mere possibility of sequential investment can prevent trade from occurring this can be interpreted as a new form of hold up if both parties prefer to invest second as the number of potential investment periods is increased the subgame perfect equilibrium can switch between a prisoners dilemma and a coordination game

can a contract solve hold up when investments have externalities a comment on de fraja 1999 abstract this comment finds an error in de fraja 1999 the correction of which overturns its main result in contrast to his claim under a mild condition the suggested contract is not only unable to solve the hold up problem but it can provide almost no incentive for specific investments when they exhibit sufficiently large direct externalities his result holds primarily when the investments have no externalities we remark on a related result in the literature and propose an alternative contract that achieves efficiency journal of economic literature classification numbers c70 j41 k12 l22