Relationship specific investment and multiple interested parties

This paper proposes a solution to the hold-up problem for situations where a seller interacts with several parties who have a common interest in inducing the seller to make a quality-enhancing investment. Since parties can observe purchase decisions, they are able to add a clause to the contract specifying that an extra payment should be made to the seller, conditional on verifiable previous purchases. Since previous purchases depend on observable but not verifiable quality, this ‘conditional multilateral contract’ provides correct incentives to restore efficiency, and is feasible in the context of both, complete and incomplete information.