Investment incentives in bilateral trading
AbstractWe characterize the surplus-maximizing trading mechanism under two-sided incomplete information and interim individual rationality, when one party can make a value-enhancing specific investment. This mechanism exhibits a trade-off between providing investment incentives and inducing voluntary participation. We analyze how the trading area of the optimal mechanism is further distorted in order to provide investment incentives. Applications of our main results and the underlying geometric analysis to institutional design issues are also provided.
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Bibliographic InfoArticle provided by Elsevier in its journal Games and Economic Behavior.
Volume (Year): 73 (2011)
Issue (Month): 2 ()
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Web page: http://www.elsevier.com/locate/inca/622836
Bilateral trading; k-Double auctions; Incomplete contracts; Investment incentives; Optimal mechanism; Opt-out clause;
Find related papers by JEL classification:
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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