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Efficient non-contractible investments

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Author Info
Harold L. Cole
George J. Mailath
Andrew Postlewaite

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Abstract

This paper addresses the question of whether agents will invest efficiently in attributes that will increase their productivity in subsequent matches with other individuals. We present a two-sided matching model in which buyers and sellers make investment decisions prior to a matching stage. Once matched, the buyer and seller bargain over the transfer price. In contrast to most matching models, preferences over possible matches are affected by decisions made before the matching process. We show that if bargaining respects the existence of outside options (in the sense that the resulting allocation is in the core of the assignment game), then efficient decisions can always be sustained in equilibrium. However, there may also be inefficient equilibria. Our analysis identifies a potential source of inefficiency not present in most matching models.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 253.

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Date of creation: 1998
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Handle: RePEc:fip:fedmsr:253

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Keywords: Investments ; Game theory;

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  3. Bryan Ellickson & Birgit Grodal & Suzanne Scotchmer & William Zame, 1997. "Clubs and the Market: Large Finite Economies," UCLA Economics Working Papers 766, UCLA Department of Economics. [Downloadable!]
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  4. Kamecke, Ulrich, 1992. "On the uniqueness of the solution to a large linear assignment problem," Journal of Mathematical Economics, Elsevier, vol. 21(6), pages 509-521. [Downloadable!] (restricted)
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  8. Hart, Oliver D., 1980. "Perfect competition and optimal product differentiation," Journal of Economic Theory, Elsevier, vol. 22(2), pages 279-312, April. [Downloadable!] (restricted)
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  10. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
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  11. Makowski, Louis & Ostroy, Joseph M, 1995. "Appropriation and Efficiency: A Revision of the First Theorem of Welfare Economics," American Economic Review, American Economic Association, vol. 85(4), pages 808-27, September. [Downloadable!] (restricted)
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  14. Gretsky, Neil E & Ostroy, Joseph M & Zame, William R, 1992. "The Nonatomic Assignment Model," Economic Theory, Springer, vol. 2(1), pages 103-27, January.
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  15. Hart, Oliver D, 1979. "Monopolistic Competition in a Large Economy with Differentiated Commodities," Review of Economic Studies, Blackwell Publishing, vol. 46(1), pages 1-30, January. [Downloadable!] (restricted)
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