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Contractual solutions to hold-up problems with quality uncertainty and unobservable investments

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  • Schmitz, Patrick W.

Abstract

Consider a seller and a buyer who write a contract. After that, the seller produces a good. She can influence the expected quality of the good by making unobservable investments. Only the seller learns the realized quality. Finally, trade can occur. It is always ex post efficient to trade. Yet, it may be impossible to achieve the first best, even though the risk-neutral parties are symmetrically informed at the contracting stage and complete contracts can be written. The second best is characterized by distortions that are reminiscent of adverse selection models (i.e., models with precontractual private information but without hidden actions).

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 46 (2010)
Issue (Month): 5 (September)
Pages: 807-816

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Handle: RePEc:eee:mateco:v:46:y:2010:i:5:p:807-816

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Web page: http://www.elsevier.com/locate/jmateco

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Keywords: Hold-up problem Hidden action Hidden information Common values;

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References

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Cited by:
  1. Bester, Helmut, 2009. "Investments and the Holdup Problem in a Matching Market," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7332, C.E.P.R. Discussion Papers.

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