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Inefficiency in a Bilateral Trading Problem with Cooperative Investment

  • Hori Kazumi

    ()

    (Hitotsubashi University)

A bilateral trading model with investment is considered. In a “cooperative” investment version of the model, the seller's investment stochastically determines the buyer's valuation of the good. The value and cost of the good are realized only after the investment is made, and the investment level and the realization of the good's value and cost are private information. I show that, under these assumptions, no contract made before the investment can simultaneously induce efficient investment and efficient ex post trade when the buyer's type is continuously distributed. This inefficiency result contrasts sharply with the efficiency result under the standard “selfish” investment model, where the seller's investment stochastically determines the seller's cost.

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Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 6 (2006)
Issue (Month): 1 (July)
Pages: 1-9

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Handle: RePEc:bpj:bejtec:v:contributions.6:y:2006:i:1:n:4
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  4. Schmitz, Patrick W., 2002. "On the Interplay of Hidden Action and Hidden Information in Simple Bilateral Trading Problems," MPRA Paper 12531, University Library of Munich, Germany.
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  6. Roger B. Myerson & Mark A. Satterthwaite, 1981. "Efficient Mechanisms for Bilateral Trading," Discussion Papers 469S, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Schmitz, Patrick W., 2002. "Simple contracts, renegotiation under asymmetric information, and the hold-up problem," European Economic Review, Elsevier, vol. 46(1), pages 169-188, January.
  8. Rogerson, William P, 1992. "Contractual Solutions to the Hold-Up Problem," Review of Economic Studies, Wiley Blackwell, vol. 59(4), pages 777-93, October.
  9. Akira Konakayama & Toshihide Mitsui & Shinichi Watanabe, 1986. "Efficient Contracting with Reliance and a Damage Measure," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 450-457, Autumn.
  10. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March.
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