Price-setting Power versus Private Information
AbstractThis 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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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-099/1.
Date of creation: 09 Dec 2003
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holdup; private information; outside options; experiments;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-23 (All new papers)
- NEP-COM-2004-04-25 (Industrial Competition)
- NEP-EXP-2004-08-23 (Experimental Economics)
- NEP-MIC-2004-08-23 (Microeconomics)
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