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Investments as signals of outside options

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  • Goldlücke, Susanne
  • Schmitz, Patrick W.

Abstract

Consider a seller who can make an observable but non-contractible investment to improve an intermediate good that is specialized to a particular buyerʼs needs. The buyer then makes a take-it-or-leave-it offer to the seller. The seller has private information about the fraction of the ex post surplus that he can realize on his own. Compared to a situation with complete information, additional investment incentives are generated by the sellerʼs desire to pretend a strong outside option. On the other hand, ex post efficiency is not attained since asymmetric information at the bargaining stage sometimes leads to inefficient separations.

Suggested Citation

  • Goldlücke, Susanne & Schmitz, Patrick W., 2014. "Investments as signals of outside options," Journal of Economic Theory, Elsevier, vol. 150(C), pages 683-708.
  • Handle: RePEc:eee:jetheo:v:150:y:2014:i:c:p:683-708
    DOI: 10.1016/j.jet.2013.12.001
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    Citations

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    Cited by:

    1. Gick, Wolfgang, 2015. "A Theory of Delegated Contracting," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113069, Verein für Socialpolitik / German Economic Association.
    2. Gea M. Lee & Seung Han Yoo, 2013. "Unobserved Investment, Signaling, and Welfare," Discussion Paper Series 1301, Institute of Economic Research, Korea University, revised 2017.
    3. Schmitz, Patrick W., 2014. "Optimal ownership of public goods reconsidered," Economics Letters, Elsevier, vol. 125(1), pages 21-24.
    4. repec:eee:indorg:v:52:y:2017:i:c:p:133-164 is not listed on IDEAS
    5. repec:eee:gamebe:v:104:y:2017:i:c:p:706-725 is not listed on IDEAS
    6. Kusterer, David J. & Schmitz, Patrick W., 2017. "The management of innovation: Experimental evidence," Games and Economic Behavior, Elsevier, vol. 104(C), pages 706-725.
    7. Schmitz, Patrick W., 2012. "Public goods and the hold-up problem under asymmetric information," Economics Letters, Elsevier, vol. 117(3), pages 642-645.
    8. repec:eee:jeborg:v:144:y:2017:i:c:p:153-165 is not listed on IDEAS
    9. Schmitz, Patrick W., 2015. "Government versus private ownership of public goods: The role of bargaining frictions," Journal of Public Economics, Elsevier, vol. 132(C), pages 23-31.
    10. Schmitz, Patrick W., 2017. "Incomplete contracts, shared ownership, and investment incentives," Journal of Economic Behavior & Organization, Elsevier, vol. 144(C), pages 153-165.
    11. Müller, Daniel & Schmitz, Patrick W., 2016. "Transaction costs and the property rights approach to the theory of the firm," European Economic Review, Elsevier, vol. 87(C), pages 92-107.
    12. repec:eee:ecolet:v:159:y:2017:i:c:p:96-99 is not listed on IDEAS
    13. Rao, Neel, 2015. "General training in labor markets: Common value auctions with unobservable investment," Journal of Economic Behavior & Organization, Elsevier, vol. 120(C), pages 19-45.
    14. Schmitz, Patrick W., 2017. "Asymmetric information and the property rights approach to the theory of the firm," Economics Letters, Elsevier, vol. 159(C), pages 96-99.

    More about this item

    Keywords

    Incomplete contracts; Relationship-specific investments; Hold-up problem; Signaling games;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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