Option Contracts and Renegotiation: A Solution to the Hold-up Problem

In this article, we analyze the canonical hold-up model of Hart and Moore under the assumption that the courts can verify delivery of the good by the seller. It is shown that no further renegotiation design is necessary to achieve the first best: simple option contracts, which give the seller the right to make the delivery decision and specify payments depending on whether delivery takes place, allow implementation of efficient investment decisions and efficient trade.