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When Does Competition Lead to Efficient Investments?

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  • Kalyan Chatterjee

    (Pennsylvania State University)

  • Y. Stephen Chiu

    (Chinese University of Hong Kong)

Abstract

The paper studies agents’ investment decisions between general and speci…c in-vestments under di¤erent ownership structures in a thin, decentralized market where each agent’s decision a¤ects the decisions and welfare of other (otherwise unrelated) agents mainly through indirect market linkages. The paper demonstrates that “excess competition among investors,” in every equilibrium, will lead to e¢cient investments, regardless of asset ownership. In the absence of such excess competition, in every equilibrium, ine¢cient investments will result, unless some special ownership arrange-ment is made. The problem in which the choice variable is investment level, instead of investment type, is also studied.

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0518.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0518

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References

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  1. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 661465000000000387, David K. Levine.
  3. Raghuram G. Rajan & Luigi Zingales, 1998. "Power In A Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 387-432, May.
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  6. Philippe Aghion & Jean Tirole, 1994. "Formal and Real Authority in Organizations," Working papers 95-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Bolton, Patrick & Whinston, Michael D, 1993. "Incomplete Contracts, Vertical Integration, and Supply Assurance," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 121-48, January.
  8. Hart, Sergiu & Mas-Colell, Andreu, 1996. "Bargaining and Value," Econometrica, Econometric Society, vol. 64(2), pages 357-80, March.
  9. Gul, Faruk, 1989. "Bargaining Foundations of Shapley Value," Econometrica, Econometric Society, vol. 57(1), pages 81-95, January.
  10. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  11. David De Meza & Ben Lockwood, 1998. "Does Asset Ownership Always Motivate Managers? Outside Options And The Property Rights Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 361-386, May.
  12. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
  13. Holmstrom, Bengt, 1999. "The Firm as a Subeconomy," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 74-102, April.
  14. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
  15. Chiu, Y Stephen, 1998. "Noncooperative Bargaining, Hostages, and Optimal Asset Ownership," American Economic Review, American Economic Association, vol. 88(4), pages 882-901, September.
  16. Sutton, John, 1986. "Non-cooperative Bargaining Theory: An Introduction," Review of Economic Studies, Wiley Blackwell, vol. 53(5), pages 709-24, October.
  17. Binmore, Ken & Shaked, Avner & Sutton, John, 1989. "An Outside Option Experiment," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 753-70, November.
  18. Ken Binmore & Ariel Rubinstein & Asher Wolinsky, 1986. "The Nash Bargaining Solution in Economic Modelling," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 176-188, Summer.
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Cited by:
  1. Antonio Nicita & Massimiliamo Vatiro, 2008. "Incomplete Contracts, Property Rights and Endogenous Outside Options," Department of Economics University of Siena 545, Department of Economics, University of Siena.
  2. Leonardo Felli & Kevin Roberts, 2011. "Does Competition Solve the Hold-up Problem?," STICERD - Theoretical Economics Paper Series /2011/561, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  3. Antonio Nicita & Simone Sepe, 2010. "Optimal Contract Design with Unilateral Market Option," Department of Economics University of Siena 593, Department of Economics, University of Siena.
  4. Antonio Nicita & Simone Sepe, 2012. "Incomplete contracts and competition: another look at fisher body/general motors?," European Journal of Law and Economics, Springer, vol. 34(3), pages 495-514, December.
  5. Massimiliano Vatiero, 2007. "Minimum Wage, Public Employment Offices and Unemployment Compensation: John R. Commons's View," Department of Economics University of Siena 521, Department of Economics, University of Siena.

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