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Exclusivity contracts, insurance and financial market foreclosure

Argenton,C.
; 
Willems,Bert
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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Appeared earlier as CentER DP 2009-024
Date
2012
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Tilburg University Research Output Collection
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Argenton, C & Willems, B 2012, 'Exclusivity contracts, insurance and financial market foreclosure', Journal of Industrial Economics, vol. 60, no. 4, pp. 609-630. https://doi.org/10.1111/joie.12000
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https://hdl.handle.net/20.500.14602/56163
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