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Sunk Costs and the Inefficiency of Relationship-Specific Investment

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  • Muthoo, Abhinay

Abstract

It is well known that relationship-specific investment will be inefficient when the parties are unable to write (binding) long-term contracts. In this note, the author exploits some of the recent developments in strategic bargaining theory in order to explore the relationship between the degree of inefficiency in the level of such relationship-specific investment and the degree of sunkness in the cost of investment. One result obtained is that the underinvestment result is not sensitive to the degree of sunkness in the cost of investment. Another result is that each player may actually overinvest when the cost of investment is not sunk. Copyright 1998 by The London School of Economics and Political Science

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  • Muthoo, Abhinay, 1998. "Sunk Costs and the Inefficiency of Relationship-Specific Investment," Economica, London School of Economics and Political Science, vol. 65(257), pages 97-106, February.
  • Handle: RePEc:bla:econom:v:65:y:1998:i:257:p:97-106
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    Cited by:

    1. Olivier Donni, 2012. "Overinvestment in Marriage-Specific Capital," THEMA Working Papers 2012-29, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    2. Stephanie Rosenkranz & Patrick W. Schmitz, 2007. "Can Coasean Bargaining Justify Pigouvian Taxation?," Economica, London School of Economics and Political Science, vol. 74(296), pages 573-585, November.
    3. Donni, Olivier, 2014. "Over-investment in marriage-specific capital," Mathematical Social Sciences, Elsevier, pages 34-43.
    4. Leith, Campbell & von Thadden, Leopold, 2008. "Monetary and fiscal policy interactions in a New Keynesian model with capital accumulation and non-Ricardian consumers," Journal of Economic Theory, Elsevier, pages 279-313.
    5. repec:gla:glaewp:2007_23 is not listed on IDEAS
    6. Campbell Leith & Leopold von Thadden, 2006. "Monetary and fiscal policy interactions in a New Keynesian model with capital accumulation and non-Ricardian consumers," Working Papers 2006_6, Business School - Economics, University of Glasgow.
    7. Francesca Flamini, "undated". "Bargining and Investment," Working Papers 2005_6, Business School - Economics, University of Glasgow.
    8. Gregory de Walque & Frank Smets & Rafael Wouters, 2006. "Firm-Specific Production Factors in a DSGE Model with Taylor Price Setting," International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
    9. Francesca Flamini, 2002. "Dynamic Accumulation in Bargaining Games," Working Papers 2002_5, Business School - Economics, University of Glasgow.
    10. Stephanie Rosenkranz & Patrick W. Schmitz, 2007. "Can Coasean Bargaining Justify Pigouvian Taxation?," Economica, London School of Economics and Political Science, vol. 74(296), pages 573-585, November.
    11. Leith, Campbell & von Thadden, Leopold, 2008. "Monetary and fiscal policy interactions in a New Keynesian model with capital accumulation and non-Ricardian consumers," Journal of Economic Theory, Elsevier, pages 279-313.

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