The dissertation consists of four chapters, covering respectively the topics on contract theories and industrial organizations. All papers, albeit diverse, fall taxonomically into the grand category of microeconomics.
Chapter 1, entitled "Outside Option Principle, Investment Specificities and Efficient Contract Design", discusses the optimal contract design problem between two parties in a framework in which alternating investments are made to implement a joint project. Investments by agents in joint project generally result in inefficiency when hold up problem is present. Investment inefficiency may be due either to the incompleteness inherent in most of contracts or to the agents' holdup behaviors incurred therefrom. This paper shows that in a non-repeat transaction framework, when the investment sequence in the static holdup model is relaxed, a dynamic sequential investment model in which one party makes an endogenous kickoff investment, may not only solve the holdup problem, but also help to break the IR failure constraint that may occur under the static sequential investment regime. Renegotiation arrangement, combined with the application of the outside option principle, can induce both parties to invest efficiently under the conditions when investments of both parties are independent or substitute at the margin. Furthermore, the result of the paper explains why the scheme of staged-financing has been widely used in venture capital industries, as observed in many empirical works in the literature.
Chapter 2, entitled "Endogenous Timing of Investment and Option Contract Credibility in Joint Ventures", studies the endogenous timing on the implementation of option contract that has been widely used in the partnership and joint venture industries. A number of papers had addressed the theoretical framework on the utilization of option contracts as instruments to improve the investment efficiency and to solve the holdup problems resulted from contractual incompleteness. However, there has been a discrepancy as to the efficacy of the option contract when it is exercised under different assumptions on the timing about the exercise date of the option contract. We show that, when time preference is a concern, credibility on the timing of the option contract is endogenously decided, without relying on the stronger assumption that renegotiation after expiry of the option contract could be credibly prohibited. In particular, our model gives the conditions for the credible implementation of an option contract with stipulated exercise date. Both time preference and the side payment ex ante will affect the bilateral investment timing for a given option contract. Dichotomously, to render credible the option contract, suitable ex ante surplus sharing should be endogenously reflected in the option contract; while for a given initial contract with stipulated option exercise price and date, the credibility of the option contract or investment path are endogenously determined. Links connecting option credibility and option contract design are determined. Ranges of feasible payment transfer in the initial contract to achieve the efficiency is endogenously determined, depending on the ex ante bargaining powers of the parties.
Chapter 3, entitled "Social Optimality, Externality and Contract Damage Remedies", discusses, in the domains of contract laws and contract theories, the effects of various rules of remedy on investment efficiencies when externality exists in a bilateral buyer-seller relationship. Existence of externality would alter the effectiveness of various damage remedy rules as employed in contract laws, such as rules of specific performance (SP), expected damage (ED) and reliance damage (RD), in inducing efficient reliance investments in bilateral buyer-seller relationship. Specifically, we show that specific performance rule and expected damage rule do not necessarily dominate one another when the buyer discounts on the resalable product. If different remedy rules are employed, product resalability will alter the status quo conditions of the parties when renegotiation is deemed to be necessary to improve ex post efficiency, which in turn will affect the reliance investment incentives ex ante. Effects of renegotiation on reliance investment and social welfare are studied under different remedy rules. Based on the extent of the resalability of the underlying product, the article gives guidance on optimal remedy rule choices to govern the contractual relationships under different trading scenarios.
Chapter 4, entitled "Effects of Piracy Market on Monopolistic Pricing Strategies", illustrates the effects of piracy market on the producer's pricing strategy and the social welfare in a framework in which the pirate, the producer and the heterogeneous consumers interact strategically. Price competition between the producer and the pirate is investigated in a two-period model to capture the idea of the preemptive power of the producer, in the sense that piracy activity generally lags the product marketing activity of the producer and renders the latter a temporary monopolistic power. Our findings show that, by introducing the preemptive power of the producer, the pirate will play an important leveraging role in reallocating between the consumers and the producer the social welfare surplus resulted from the entry of the pirate who only captures a relatively small portion of the surplus in comparison with that of the consumers and the producer, as partially justified by the empirical works in the literature. When the pirated product is a close substitute of the original one, the pirate would tend to lower the quality of the pirated product, thus lowering the valuation expectation of the consumers on the pirated product, even though the pirate possesses the capability or copying techniques to make it with higher quality. Moreover, when network externality exists in the market, the pirate will choose an optimal quality parameter, which is a decreasing function of the externality parameter. Effects of network externality on the choice of preventative measures by the producer are also discussed.
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