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Inefficiency in a Bilateral Trading Problem with Cooperative Investment

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  • Hori, Kazumi

Abstract

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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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/16927/1/070econDP05-02.pdf
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Bibliographic Info

Paper provided by Graduate School of Economics, Hitotsubashi University in its series Discussion Papers with number 2005-02.

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Length: 8 p.
Date of creation: May 2005
Date of revision:
Handle: RePEc:hit:econdp:2005-02

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Keywords: Bilateral Trading; Cooperative Investment; Contracts;

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References

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  1. Schmitz, Patrick W., 2002. "On the Interplay of Hidden Action and Hidden Information in Simple Bilateral Trading Problems," MPRA Paper 12531, University Library of Munich, Germany.
  2. Nöldeke, Georg & Schmidt, Klaus M., 1995. "Option contracts and renegotiation: A solution to the Hold-Up Problem," Munich Reprints in Economics 19329, University of Munich, Department of Economics.
  3. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March.
  4. Riley, John & Zeckhauser, Richard, 1983. "Optimal Selling Strategies: When to Haggle, When to Hold Firm," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 267-89, May.
  5. Schmitz, Patrick W., 2002. "On simple contracts, renegotiation under asymmetric information, and the hold-up problem," MPRA Paper 12530, University Library of Munich, Germany.
  6. Rogerson, William P, 1992. "Contractual Solutions to the Hold-Up Problem," Review of Economic Studies, Wiley Blackwell, vol. 59(4), pages 777-93, October.
  7. Roger B. Myerson & Mark A. Satterthwaite, 1981. "Efficient Mechanisms for Bilateral Trading," Discussion Papers 469S, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Schmitz, Patrick W., 2002. "Simple contracts, renegotiation under asymmetric information, and the hold-up problem," European Economic Review, Elsevier, vol. 46(1), pages 169-188, January.
  9. Akira Konakayama & Toshihide Mitsui & Shinichi Watanabe, 1986. "Efficient Contracting with Reliance and a Damage Measure," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 450-457, Autumn.
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Citations

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Cited by:
  1. Zhao, Rui R., 2008. "Rigidity in bilateral trade with holdup," Theoretical Economics, Econometric Society, vol. 3(1), March.
  2. Bester, Helmut & Krähmer, Daniel, 2012. "Exit options in incomplete contracts with asymmetric information," Journal of Economic Theory, Elsevier, vol. 147(5), pages 1947-1968.
  3. Roig, Guillem, 2014. "What Determines Market Structure? An Explanation from Cooperative Investment with Non‐Exclusive Co," TSE Working Papers 14-482, Toulouse School of Economics (TSE).
  4. Krähmer, Daniel, 2012. "Auction design with endogenously correlated buyer types," Journal of Economic Theory, Elsevier, vol. 147(1), pages 118-141.
  5. Maria Goltsman, 2011. "Optimal information transmission in a holdup problem," RAND Journal of Economics, RAND Corporation, vol. 42(3), pages 495-526, 09.
  6. Kazumi Hori, 2014. "Contracting for Multiple Goods under Asymmetric Information: The Two-goods Case," KIER Working Papers 888, Kyoto University, Institute of Economic Research.

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