What Is An Option Agreement

90) has shown that options contracts can mitigate the problem of hold-up (a problem of underinvestment that arises when the exact amount of the investment cannot be contractually determined). [8] In contract theory, however, there is debate about whether option contracts still make sense if the parties cannot rule out future renegotiations. [9] As von Tirole (1999) pointed out, this debate is at the heart of discussions on the foundations of the theory of incomplete treaties. [10] In a laboratory experiment, Hoppe and Schmitz (2011) confirmed that non-negotiable option contracts can actually solve the hold-up problem. [11] Moreover, it turns out that option contracts still make sense even if renegotiations cannot be excluded […].