Specific Investment, Absence of Commitment and Observability
AbstractI consider the problem of the design of an optimal self-selection contract scheme for a principal who is buying a good from an agent which has the opportunity of making a cost-reducing unobservable investment prior to the contracting stage. Because of a hold-up problem, the agent will randomizes on his investment level. This forces the principal to spend informational "rents" to achieve screening. In equilibrium, these "rents" match the investment costs and the resulting contract yields a price schedule such that the marginal revenue of the agent equals his long run marginal cost curve. Since the agent's "type" is an endogenously determined characteristic, I argue that informational "rents" should be interpreted as quasi-rents that stand as a payment factor for investment.
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Bibliographic InfoPaper provided by Laval - Recherche en Energie in its series Papers with number 99-03.
Length: 31 pages
Date of creation: 1999
Date of revision:
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INVESTMENTS ; CONTRACTS;
Other versions of this item:
- Patrick González, 1999. "Specific Investment, Absence of Commitment and Observability," CIRANO Working Papers 99s-06, CIRANO.
- Gonz�lez, Patrick, 1999. "Specific Investment, Absence of Commitment and Observability," Cahiers de recherche 9902, Université Laval - Département d'économique.
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
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