A bilateral trading model with investment is considered. In the "cooperative" investment version of the model, the seller's investment stochastically determines the buyer's valuation of the good. The value and cost of the good are realized only after the investment is made, and the investment level and the realization of the good's value and cost are private information. I show that under these assumptions, no contract made prior to the investment can simultaneously induce efficient investment and efficient ex-post trade when the buyer's type is continuously distributed. This inefficiency result contrasts sharply with the efficiency result under the standard "selfish" investment model, where the seller's investment stochastically determines the seller's cost.
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Paper provided by Graduate School of Economics, Hitotsubashi University in its series Discussion Papers with number
2005-02.
Find related papers by JEL classification: C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information