Contractual signaling, relationship-specific investment and exclusive agreements

- Analyzes a model of hold-up with asymmetric information at the contracting stage.
- Shows that the investment level can be inefficient if only quantity is contractible.
- Shows that the use of exclusivity clauses may solve the inefficiency in investment.

I analyze a model of hold-up with asymmetric information at the contracting stage. The asymmetry of information concerns the value of trade with external parties. I show that contractual signaling and efficiency of investment can conflict if only quantity is contractible. This conflict generates inefficient equilibria in terms of investment. Contracting on exclusivity in addition to quantity resolves the conflict and consequently eliminates the inefficiency of investment.