Abstract
We analyze the effect of liquidated damage rules in exclusive contracts
that are negotiated in a sequential bargaining process between one seller
and two buyers with endogenous outside options. We show that assumptions
on the distribution of bargaining power influence the size of the payment
of damages and determine which contractual party benefits from
including liquidated damage rules. Furthermore, we show that the effect
of the payment of damages on the efficiency of the consummated deals
depends on the possibility to sign more than one contract. Only if this
is not possible, damage rules may prevent the breaking and entering of
contracts and thus lead to inefficient deals in the market of corporate control,
or allow for ‘naked’ exclusion in the context of supplier contracts with
externalities.
that are negotiated in a sequential bargaining process between one seller
and two buyers with endogenous outside options. We show that assumptions
on the distribution of bargaining power influence the size of the payment
of damages and determine which contractual party benefits from
including liquidated damage rules. Furthermore, we show that the effect
of the payment of damages on the efficiency of the consummated deals
depends on the possibility to sign more than one contract. Only if this
is not possible, damage rules may prevent the breaking and entering of
contracts and thus lead to inefficient deals in the market of corporate control,
or allow for ‘naked’ exclusion in the context of supplier contracts with
externalities.
Original language | English |
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Place of Publication | Utrecht |
Publisher | UU USE Tjalling C. Koopmans Research Institute |
Number of pages | 34 |
Publication status | Published - 2011 |
Publication series
Name | Discussion Paper Series / Tjalling C. Koopmans Research Institute |
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No. | 06 |
Volume | 11 |
ISSN (Electronic) | 2666-8238 |
Keywords
- sequential bargaining
- bargaining power
- outside option
- liquidated damage rules
- termination fees
- exclusivity agreements