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Strategic Shirking in Bilateral Trade

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Author Info
Christoph Luelfesmann () (Simon Fraser University)

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Abstract

This paper explores a version of the canonical holdup model where agents undertake specific investments prior to their transaction. In this setting, we identify a novel reason for contractual inefficiency. An investing party (here, the seller) may shirk for strategic reasons, in particular, exert an effort so low that subsequent trade becomes inefficient. We first show that under a fixed-price contract which would otherwise be optimal and induce trade, strategic shirking can arise irrespective of the precontracted trade price. We then establish that if strategic shirking arises under a fixed-price contract, no general mechanism exists which restores efficient trade. Finally, we show that the defection issue is more severe when the parties trade after the buyer's valuation was realized, as compared to a scenario where the trade transaction is finalized in a state of uncertainty.

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File URL: http://www.econ.sfu.ca/research/RePEc/sfu/sfudps/dp07-21.pdf
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Publisher Info
Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp07-21.

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Length: 29
Date of creation: Oct 2007
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Handle: RePEc:sfu:sfudps:dp07-21

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Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
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Related research
Keywords: Bilateral Trade Hold-Up Specific Investments Shirking.

Find related papers by JEL classification:
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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