Buyer-Option Contracts Restored: Renegotiation, Inefficient Threats, and the Hold-Up Problem
Apr 1, 2004
Thomas P. Lyon, Erb Faculty Member was published in The Journal of Law, Economics, & Organization, 20(1): 148-169. Thomas P. Lyon and Eric Rasmusen (2004)
“Buyer-option” contracts, in which the buyer selects the product variant to be traded and chooses whether to accept delivery, are often used to solve holdup problems. We present a simple game that focuses sharply on subgames in which the buyer proposes inefficient actions in order to improve his bargaining position. We argue for one of several alternative ways to model this situation. We then apply that modeling choice to recent models of the foundations of incomplete contracts and show that a buyer-option contract is sufficient to induce first-best outcomes.