Premium
Specific Investments, Flexible Adaptation, and Requirement Contracts
Author(s) -
Zhu Tian
Publication year - 2003
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1093/ei/cbg009
Subject(s) - ex ante , microeconomics , flexibility (engineering) , economics , incentive , procurement , adaptation (eye) , simple (philosophy) , incomplete contracts , industrial organization , macroeconomics , philosophy , physics , management , epistemology , optics
In a simple hold‐up model with contractible cost‐related variables, I show that an optimal requirement contract with “standard cost”–based nonlinear pricing can provide both ex post flexibility for adaptation and ex ante incentives for relationship‐specific investments. The result is related to contractual arrangements observed in vertical procurement relationships.