Sunk Investments Lead to Unpredictable Prices (Second Version)
AbstractWe study transactions that require investments before trading in a competitive market, when forward contracts fixing the transaction price are absent. We show that, despite the market being perfectly competitive and subject to arbitrarily little uncertainty, the inability to jointly determine investment levels and prices may make it impossible for buyers and sellers to predict the prices at which they will trade, leading to inefficient levels of investment and trade.
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Bibliographic InfoPaper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 04-007.
Length: 32 pages
Date of creation: 03 Jun 2003
Date of revision: 30 Jan 2004
Sunk investments; inefficient investments; sunspots; random prices.;
Find related papers by JEL classification:
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-01-02 (All new papers)
- NEP-FIN-2005-01-02 (Finance)
- NEP-MIC-2005-01-02 (Microeconomics)
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