Specific Investment, Absence of Commitment and Observability
AbstractI consider the problem of the design of an optimal self-selecting 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 Université Laval - Département d'économique in its series Cahiers de recherche with number 9902.
Date of creation: 1999
Date of revision:
Specific Investment; Hold-up; Observability; Mechanism Design; Renegotiation; investissement spécifique; observabilité; design de mécanisme; renégociation;
Other versions of this item:
- Patrick González, 1999. "Specific Investment, Absence of Commitment and Observability," CIRANO Working Papers 99s-06, CIRANO.
- Gonzalez, P., 1999. "Specific Investment, Absence of Commitment and Observability," Papers 99-03, Laval - Recherche en Energie.
- 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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