Exclusivity contracts, insurance and financial market foreclosure

Research output: Contribution to journalArticleScientificpeer-review

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.
LanguageEnglish
Pages609-630
JournalJournal of Industrial Economics
Volume60
Issue number4
DOIs
StatePublished - 2012

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Foreclosure
Insurance market
Financial markets
Exclusivity
Investors
Product market
Risk sharing
Optimal risk sharing
Forward contracts
Trade-offs
Exclusion
Risk aversion
Bilateral
Buyers
Crowd-out

Cite this

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title = "Exclusivity contracts, insurance and financial market foreclosure",
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.",
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Exclusivity contracts, insurance and financial market foreclosure. / Argenton, C.; Willems, Bert.

In: Journal of Industrial Economics, Vol. 60, No. 4, 2012, p. 609-630.

Research output: Contribution to journalArticleScientificpeer-review

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