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Cheap Talk about Specific Investments

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Author Info

  • Farrell, Joseph
  • Gibbons, Robert

Abstract

We consider a problem in which a buyer has private information about the efficient scale or nature of a relationship-specific investment by a producer. We show that reducing the producer's ex post bargaining power may enhance efficiency by providing incentives for the buyer to reveal his private information before the investment is made. This consideration can outweigh the well-known "hold-up" problem that arises if the producer does not have all the bargaining power. Copyright 1995 by Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Journal of Law, Economics and Organization.

Volume (Year): 11 (1995)
Issue (Month): 2 (October)
Pages: 313-34

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Handle: RePEc:oup:jleorg:v:11:y:1995:i:2:p:313-34

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Postal: Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK
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Citations

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Cited by:
  1. Ohlendorf, Susanne & Schmitz, Patrick, 2009. "Signaling an Outside Option," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 281, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  2. Schmitz, Patrick W., 2001. "The Hold-Up Problem and Incomplete Contracts: A Survey of Recent Topics in Contract Theory," MPRA Paper 12562, University Library of Munich, Germany.
  3. Schmitz, Patrick W., 2010. "Contractual solutions to hold-up problems with quality uncertainty and unobservable investments," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 807-816, September.
  4. Schmitz, Patrick W., 2002. "On the Interplay of Hidden Action and Hidden Information in Simple Bilateral Trading Problems," MPRA Paper 12531, University Library of Munich, Germany.
  5. Schmitz, Patrick W., 2013. "Bargaining position, bargaining power, and the property rights approach," MPRA Paper 44953, University Library of Munich, Germany.
  6. Lars Frisell & Johann Lagerloef, 2005. "Eliciting Demand Information through Cheap Talk: An Argument in Favor of Price Regulations," Royal Holloway, University of London: Discussion Papers in Economics 05/10, Department of Economics, Royal Holloway University of London, revised Aug 2005.
  7. Frisell, Lars & Lagerlöf, Johan N.M., 2008. "Eliciting demand information through cheap talk: An argument in favor of a ban on price discrimination," Economics Letters, Elsevier, vol. 99(3), pages 421-424, June.
  8. Kirsten Foss & Nicolai J. Foss, 1999. "Understanding Ownership Residual Rights of Control and Appropriable Control Rights," DRUID Working Papers 99-4, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
  9. Patrick W. Schmitz, 2006. "Information Gathering, Transaction Costs, and the Property Rights Approach," American Economic Review, American Economic Association, vol. 96(1), pages 422-434, March.
  10. Schmitz, Patrick W., 2010. "On contractual solutions to hold-up problems with quality uncertainty and unobservable investments," MPRA Paper 23157, University Library of Munich, Germany.
  11. Lau, Stephanie, 2011. "Investment incentives in bilateral trading," Games and Economic Behavior, Elsevier, vol. 73(2), pages 538-552.
  12. Schmitz, Patrick W., 2002. "Simple contracts, renegotiation under asymmetric information, and the hold-up problem," European Economic Review, Elsevier, vol. 46(1), pages 169-188, January.
  13. Schmitz, Patrick W., 2002. "On simple contracts, renegotiation under asymmetric information, and the hold-up problem," MPRA Paper 12530, University Library of Munich, Germany.

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