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Efficient Non-Contractible Investments in Large Economies

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  • Cole, Harold L.
  • Mailath, George J.
  • Postlewaite, Andrew

Abstract

Do investors making complementary investments face the correct incentives, especially when they cannot contract with each other prior to their decisions? We present a two-sided matching model in which buyers and sellers make investments prior to matching. Once matched, buyer and seller bargain over the price, taking into account outside options. Efficient decisions can always be sustained in equilibrium. We characterize the inefficiencies that can arise in equilibrium, and show that equilibria will be constrained efficient. We also show that the degree of diversity in a large market has implications for the extent of any inefficiency.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 101 (2001)
Issue (Month): 2 (December)
Pages: 333-373

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Handle: RePEc:eee:jetheo:v:101:y:2001:i:2:p:333-373

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Web page: http://www.elsevier.com/locate/inca/622869

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References

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  15. Acemoglu, Daron & Shimer, Robert, 1999. "Holdups and Efficiency with Search Frictions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 827-49, November.
  16. Cole Harold Linh & Mailath George J. & Postlewaite Andrew, 2001. "Efficient Non-Contractible Investments in Finite Economies," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 1(1), pages 1-34, March.
  17. Kamecke, Ulrich, 1992. "On the uniqueness of the solution to a large linear assignment problem," Journal of Mathematical Economics, Elsevier, vol. 21(6), pages 509-521.
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