Contractual Signalling, Relationship-Specific Investment and Exclusive Agreements

I analyze a simple model of hold-up with asymmetric information at the contracting stage. I show that contractual signalling and efficiency of investment can conflict if only quantity is contractible. This is because contracted quantity encourages investment in the relationship but also signals information. This conflict generates inefficient equilibria in terms of investment. Contracting on exclusivity in addition to quantity resolves the conflict (and consequently eliminates the inefficiency of investment) when the asymmetry of information concerns the value of trade with external parties. While exclusivity also signals information, unlike quantity it does not directly affect relationship-specific investment