Summary:
Any cooperation that profits from relation-specific investments suf-
fers from the well-known hold-up problem. If investments are not
enforceable by an outside authority, the gains fall prey to individual
opportunism caused by a free-rider problem. If, in addition, individ-
ual investments exhibit positive cross effects, Che and Hausch (1999)
provide a negative result and show that contracts cannot overcome the
hold up due to a lack of verifiable commitment. This paper develops a
mechanism that provides such a commitment device: (1) It introduces
an acknowledgement game that procures reliable. (2) It embeds the
original contracting problem into two institutional designs - a market
based one and a private design - that support enforcement. These
two devices reestablish efficient investments as enforceable results of
a contract.