Consider a principal-agent model in which the agent must sink an investment before the contract is written. If the agent has private information (e.g. about production costs), this may give rise to an information rent that is sometimes large enough to resolve the inherent holdup problem. In this paper the importance of the information timing is analyzed. Does it matter whether the agent learns his private information before or after investment? 'Early' product cost information has two effects on investments. First, when the agent receives (some) production cost information before investing, the high-cost types of the agent will be less willing to invest than the low-cost types. The direct effect will trigger a signaling effect: if low-cost types invest and high-cost types do not, then investment is a sign of low costs, leading the principal to offer a less favorable contract for the agent. The signaling effect will always increase the holdup-problem, while the direct effect may work both ways.
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Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number
CESifo Working Paper No. 88.