OPTION CONTRACTS AND RENEGOTIATION - A SOLUTION TO THE HOLD-UP PROBLEM

In this article, we analyze the canonical hold-up model of Hart and Mo ore under the assumption that the courts can verify delivery of the go od by the seller. It is shown that no further renegotiation design is necessary to achieve the first best: simple option contracts, which gi ve the seller the right to take the delivery decision and specify paym ents depending on whether delivery takes place, allow implementation o f efficient investment decisions and efficient trade.