Switching costs and screening efficiency of incomplete contracts
AbstractWe study the role of switching costs in a dynamic buyer-seller relationship where quality is not contractible and the sellers retain private information about their quality-relevant abilities. In this environment buyer switching costs increase the seller's bargaining power in negotiations for the second contract, but they also induce the seller to improve quality during the first contract, in signalling his type. The overall effect is to enhance efficiency and increase the buyer's welfare. This beneficial effect stems from the link between quality, the buyer's posterior beliefs, and ex post distribution of bargaining power as a function of the switching cost.
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Bibliographic InfoArticle provided by Canadian Economics Association in its journal Canadian Journal of Economics.
Volume (Year): 33 (2000)
Issue (Month): 4 (November)
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Postal: Canadian Economics Association Prof. Steven Ambler, Secretary-Treasurer c/o Olivier Lebert, CEA/CJE/CPP Office C.P. 35006, 1221 Fleury Est Montréal, Québec, Canada H2C 3K4
Web page: http://economics.ca/cje/
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- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
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- repec:ebl:ecbull:v:12:y:2002:i:5:p:1-9 is not listed on IDEAS
- Xiaopeng Xu, 2002. "Quality over-provision of information goods," Economics Bulletin, AccessEcon, vol. 12(5), pages 1-9.
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