Advanced Search
MyIDEAS: Login to save this paper or follow this series

Too Much Investment : A Problem Of Coordination Failure

Contents:

Author Info

  • de Meza, David

    (LSE)

  • Lockwood, Ben

    (University of Warwick)

Abstract

This paper shows that coordination failure and contractual incompleteness can lead to socially excessive investment. Firms and workers choose investment levels, then enter a stochastic matching process. If investment levels are discrete, and match frictions are low, high-investing workers (firms) impose a negative pecuniary externality on any worker (firm) who cuts investment. Specifically, an agent cutting investment subsequently bargains with a partner with a binding outside option due to the fact that it can easily match with another high investor. The deviant thus bears the full loss in revenue from its action. However, given enough complementarity in investments, when one agent cuts investment it is efficient that its partner also does so. So, only part of the cost saving accrues to the deviant, with the implication that the net private gain to cutting investment is less than the social gain. A similar argument establishes that over-investment can occur when agents are heterogenous i.e. differ in their cost of investing, even if investments are continuous. Then, over-investment occurs because low-cost investors have a private incentive to invest to shift rent away from high-cost investors. Our model can also explain some recent trends in graduate/non-graduate wage differentials.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp703a.pdf
Download Restriction: no

Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 703.

as in new window
Length: 41 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:wrk:warwec:703

Contact details of provider:
Postal: CV4 7AL COVENTRY
Phone: +44 (0) 2476 523202
Fax: +44 (0) 2476 523032
Web page: http://www2.warwick.ac.uk/fac/soc/economics/
More information through EDIRC

Related research

Keywords: hold-up ; coordination failure ; matching ; over-investment;

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Gale, Douglas, 1987. "Limit theorems for markets with sequential bargaining," Journal of Economic Theory, Elsevier, vol. 43(1), pages 20-54, October.
  2. Leonardo Felli & Kevin Roberts, . "Does Competition Solve the Hold-up Problem?," Penn CARESS Working Papers 4a7d448e61f494c5472087aed, Penn Economics Department.
  3. Maarten Goos & Alan Manning, 2003. "Lousy and lovely jobs: the rising polarization of work in Britain," LSE Research Online Documents on Economics 20002, London School of Economics and Political Science, LSE Library.
  4. Vincent P. Crawford, 1986. "Long-Term Relationships Governed by Short-Term Contracts," Working Papers 585, Princeton University, Department of Economics, Industrial Relations Section..
  5. Coles, Melvyn G & Muthoo, Abhinay, 1998. "Strategic Bargaining and Competitive Bidding in a Dynamic Market Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 65(2), pages 235-60, April.
  6. Maarten Goos & Alan Manning, 2003. "Lousy and Lovely Jobs: the Rising Polarization of Work in Britain," CEP Discussion Papers dp0604, Centre for Economic Performance, LSE.
  7. Murphy, Kevin M. & Shleifer, Andrei & Vishny, Robert W., 1989. "Industrialization and the Big Push," Scholarly Articles 3606235, Harvard University Department of Economics.
  8. Masters, Adrian M, 1998. "Efficiency of Investment in Human and Physical Capital in a Model of Bilateral Search and Bargaining," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 477-94, May.
  9. North, Douglass C. & Weingast, Barry R., 1989. "Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England," The Journal of Economic History, Cambridge University Press, vol. 49(04), pages 803-832, December.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Shingo Ishiguro, 2010. "Holdup, search, and inefficiency," Economic Theory, Springer, vol. 44(2), pages 307-338, August.
  2. Surajeet Chakravarty, 2005. "Resolving Contractual Disputes: Arbitration vs Mediation," The Centre for Market and Public Organisation 05/117, Department of Economics, University of Bristol, UK.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:wrk:warwec:703. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Helen Neal).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.