EconStor >
Northwestern University >
Department of Economics - Center for the Study of Industrial Organization (CSIO), Northwestern University  >
CSIO Electronic Working Papers, Northwestern University >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/38666
  
Title:Efficient exclusion PDF Logo
Authors:Moen, Espen R.
Riis, Christian
Issue Date:2005
Series/Report no.:CSIO working paper 0069
Abstract:In an important paper, Aghion and Bolton (1987) argue that a buyer and a seller may agree on high liquidation damages in order to extract rents from future suppliers. As this may distort future trade, it may be socially wasteful. We argue that Aghion and Bolton's' analysis is incomplete in some respects, as they do not model the entry of new suppliers. We construct a model where entry is costly, so that entering suppliers have to earn a quasi-rent in order to recoup the entry cost. Reducing an entrant's profits by the help of a breach penalty then reduces the probability of entry in the first place, thus making a breach penalty less attractive for the contracting parties. We show that the initial buyer and seller only have incentives to include a breach penalty if there is excessive entry without it. Forcing the initial buyer and seller to eliminate the breach penalty reduces welfare.
Subjects:Exclusive contracts
breach penalties
entry
efficiency
JEL:L42
Document Type:Working Paper
Appears in Collections:CSIO Electronic Working Papers, Northwestern University

Files in This Item:
File Description SizeFormat
505203693.pdf278.25 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/38666

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.