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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

Suggested Citation

  • 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. Donni, Olivier, 2014. "Over-investment in marriage-specific capital," Mathematical Social Sciences, Elsevier, vol. 67(C), pages 34-43.
    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. 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, vol. 140(1), pages 279-313, May.
    4. repec:gla:glaewp:2007_23 is not listed on IDEAS
    5. Francesca Flamini, "undated". "Bargining and Investment," Working Papers 2005_6, Business School - Economics, University of Glasgow.
    6. Francesca Flamini, 2002. "Dynamic Accumulation in Bargaining Games," Working Papers 2002_5, Business School - Economics, University of Glasgow.
    7. 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.

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