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Price-setting Power versus Private Information

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  • Randolph Sloof

    ()
    (Faculty of Economics and Econometrics, Universiteit van Amsterdam)

Abstract

This paper investigates the extent of the holdup underinvestment problem in a buyer-seller relationship in which the seller has private information about his alternative trading opportunities. Theory predicts that, compared with a situation in which outside options are publicly observed, the seller obtains an informational rent while the buyer bears an informational loss. As a result the seller is predicted to invest more while the buyer is expected to invest less. In contrast to these predictions, private information appears to have no impact on the investment levels observed in the experiment. A second main finding is that investments do increase with the price-setting power of the investor. Overall the results question some recent theoretical suggestions that private information rents might substitute for price-setting power in mitigating holdup.

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File URL: http://papers.tinbergen.nl/03099.pdf
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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-099/1.

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Date of creation: 09 Dec 2003
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Handle: RePEc:dgr:uvatin:20030099

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Web page: http://www.tinbergen.nl

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Keywords: holdup; private information; outside options; experiments;

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References

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  23. Sloof, Randolph & Sonnemans, Joep & Oosterbeek, Hessel, 2004. "Specific investments, holdup, and the outside option principle," European Economic Review, Elsevier, Elsevier, vol. 48(6), pages 1399-1410, December.
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Cited by:
  1. Oosterbeek, Hessel & Sloof, Randolph & Sonnemans, Joep, 2011. "Rent-seeking versus productive activities in a multi-task experiment," European Economic Review, Elsevier, Elsevier, vol. 55(5), pages 630-643, June.

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