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Investments as signals of outside options

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  • Goldlücke, Susanne
  • Schmitz, Patrick W.

Abstract

Consider a seller who can make an observable but non-contractible investment to improve an intermediate good that is specialized to a particular buyerʼs needs. The buyer then makes a take-it-or-leave-it offer to the seller. The seller has private information about the fraction of the ex post surplus that he can realize on his own. Compared to a situation with complete information, additional investment incentives are generated by the sellerʼs desire to pretend a strong outside option. On the other hand, ex post efficiency is not attained since asymmetric information at the bargaining stage sometimes leads to inefficient separations.

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Bibliographic Info

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

Volume (Year): 150 (2014)
Issue (Month): C ()
Pages: 683-708

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Handle: RePEc:eee:jetheo:v:150:y:2014:i:c:p:683-708

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

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Keywords: Incomplete contracts; Relationship-specific investments; Hold-up problem; Signaling games;

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Cited by:
  1. Schmitz, Patrick W., 2013. "Public goods and the hold-up problem under asymmetric information," MPRA Paper 53717, University Library of Munich, Germany.

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