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Incomplete contracting, renegotiation, and expectation-based loss aversion

Title data

Herweg, Fabian ; Karle, Heiko ; Müller, Daniel:
Incomplete contracting, renegotiation, and expectation-based loss aversion.
In: Journal of Economic Behavior & Organization. Vol. 145 (January 2018) . - pp. 176-201.
ISSN 0167-2681
DOI: https://doi.org/10.1016/j.jebo.2017.07.033

Official URL: Volltext

Abstract in another language

We consider a simple trading relationship between an expectation-based loss-averse buyer and a profit-maximizing seller. When writing a long-term contract the parties have to rely on renegotiation in order to ensure materially efficient trade ex post. We show that if the buyer expects renegotiation to occur, the seller can opportunistically exploit the buyer's attachment to the expected outcome of renegotiation. In other words, incomplete contracts create a new type of hold-up problem. If credible, the buyer prefers to expect not to renegotiate, which gives rise to ex post inefficiencies. In a next step, we allow the buyer to undertake a non-contractible investment. We find that loss aversion can mitigate the traditional hold-up problem.

Further data

Item Type: Article in a journal
Refereed: Yes
Keywords: Behavioral contract theory; Expectation-based loss aversion; Hold-up problem; Incomplete contracts; Renegotiation
Subject classification: JEL classification: C78;D03;D86
Institutions of the University: Faculties > Faculty of Law, Business and Economics > Department of Economics > Chair Economics VIII: International Competition Economics > Chair Economics VIII: International Competition Economics - Univ.-Prof. Dr. Fabian Herweg
Faculties
Faculties > Faculty of Law, Business and Economics
Faculties > Faculty of Law, Business and Economics > Department of Economics
Faculties > Faculty of Law, Business and Economics > Department of Economics > Chair Economics VIII: International Competition Economics
Result of work at the UBT: Yes
DDC Subjects: 300 Social sciences
300 Social sciences > 330 Economics
Date Deposited: 12 Dec 2017 08:16
Last Modified: 12 Dec 2017 08:16
URI: https://eref.uni-bayreuth.de/id/eprint/40914