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Cheap Talk about Specific Investments

Author

Listed:
  • Farrell, Joseph
  • Gibbons, Robert

Abstract

We consider a problem in which a buyer has private information about the efficient scale or nature of a relationship-specific investment by a producer. We show that reducing the producer's ex post bargaining power may enhance efficiency by providing incentives for the buyer to reveal his private information before the investment is made. This consideration can outweigh the well-known "hold-up" problem that arises if the producer does not have all the bargaining power. Copyright 1995 by Oxford University Press.

Suggested Citation

  • Farrell, Joseph & Gibbons, Robert, 1995. "Cheap Talk about Specific Investments," Journal of Law, Economics, and Organization, Oxford University Press, vol. 11(2), pages 313-334, October.
  • Handle: RePEc:oup:jleorg:v:11:y:1995:i:2:p:313-34
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    Citations

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    Cited by:

    1. Lau, Stephanie, 2011. "Investment incentives in bilateral trading," Games and Economic Behavior, Elsevier, vol. 73(2), pages 538-552.
    2. Schmitz, Patrick W., 2002. "On the Interplay of Hidden Action and Hidden Information in Simple Bilateral Trading Problems," Journal of Economic Theory, Elsevier, vol. 103(2), pages 444-460, April.
    3. Schmitz, Patrick W., 2013. "Bargaining position, bargaining power, and the property rights approach," Economics Letters, Elsevier, vol. 119(1), pages 28-31.
    4. Cahuc, Pierre & Kramarz, Francis, 1997. "Voice and Loyalty as a Delegation of Authority: A Model and a Test on Matched Worker-Firm Panels," Journal of Labor Economics, University of Chicago Press, vol. 15(4), pages 658-688, October.
    5. Frisell, Lars & Lagerlöf, Johan N.M., 2008. "Eliciting demand information through cheap talk: An argument in favor of a ban on price discrimination," Economics Letters, Elsevier, vol. 99(3), pages 421-424, June.
    6. Patrick W. Schmitz, 2006. "Information Gathering, Transaction Costs, and the Property Rights Approach," American Economic Review, American Economic Association, vol. 96(1), pages 422-434, March.
    7. Frisell, Lars & Lagerlöf, Johan N. M., 2005. "Eliciting Demand Information through Cheap Talk: An Argument in Favour of Price Regulations," CEPR Discussion Papers 5343, C.E.P.R. Discussion Papers.
    8. Schmitz, Patrick W., 2010. "Contractual solutions to hold-up problems with quality uncertainty and unobservable investments," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 807-816, September.
    9. Schmitz, Patrick W, 2001. "The Hold-up Problem and Incomplete Contracts: A Survey of Recent Topics in Contract Theory," Bulletin of Economic Research, Wiley Blackwell, vol. 53(1), pages 1-17, January.
    10. Schmitz, Patrick W., 2010. "On contractual solutions to hold-up problems with quality uncertainty and unobservable investments," MPRA Paper 23157, University Library of Munich, Germany.
    11. 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.
    12. Kirsten Foss & Nicolai J. Foss, 1999. "Understanding Ownership Residual Rights of Control and Appropriable Control Rights," DRUID Working Papers 99-4, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
    13. Schmitz, Patrick W., 2002. "On simple contracts, renegotiation under asymmetric information, and the hold-up problem," MPRA Paper 12530, University Library of Munich, Germany.
    14. Ohlendorf, Susanne & Schmitz, Patrick, 2009. "Signaling an Outside Option," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 281, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    15. Xiaotong Li, 2005. "Cheap Talk and Bogus Network Externalities in the Emerging Technology Market," Marketing Science, INFORMS, vol. 24(4), pages 531-543, October.
    16. Birger Wernerfelt, 2008. "Bargaining Before or After Communication?," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(2), pages 211-229, June.

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