Abstract
We study the trade-off between the positive effects (risk-sharing) and negative effects (exclusion) of exclusivity contracts. We revisit the seminal model of Aghion and Bolton [1987] under risk-aversion and show that although exclusivity contracts induce optimal risk-sharing, they can be used not only to deter the entry of a more efficient rival into the product market but also to crowd out financial investors willing to insure the buyer at competitive rates. We further show that in a world without financial investors, purely financial bilateral instruments, such as forward contracts, achieve optimal risk-sharing without distorting product market outcomes. Thus, risk-sharing alone cannot be invoked to defend exclusivity contracts.
Original language | English |
---|---|
Pages (from-to) | 609-630 |
Journal | Journal of Industrial Economics |
Volume | 60 |
Issue number | 4 |
DOIs | |
Publication status | Published - 2012 |