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Investment and Screening Under Asymmetric Endogenous Information

Listed author(s):
  • Patrick Gonzàlez

    ()

    (GREEN, CRDE, CIRANO, and Université Laval)

This article provides an analysis of screening contracts in a complete but imperfect information environment as opposed to the usual incomplete information (Bayesian) environment. An agent faces a hold-up situation while making a cost-reducing specific investment that is not observed by the principal. To prevent the hold-up, the agent randomizes his investment strategy and the principal offers a screening contract. The informational rents provided by the equilibrium contract finance the investment. For a large class of cost functions, the randomization is such that the marginal surplus follows a Power distribution.

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Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 35 (2004)
Issue (Month): 3 (Autumn)
Pages: 502-519

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Handle: RePEc:rje:randje:v:35:y:2004:3:p:502-519
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  1. Edlin, Aaron S & Reichelstein, Stefan, 1996. "Holdups, Standard Breach Remedies, and Optimal Investment," American Economic Review, American Economic Association, vol. 86(3), pages 478-501, June.
  2. William P. Rogerson, 1992. "Contractual Solutions to the Hold-Up Problem," Review of Economic Studies, Oxford University Press, vol. 59(4), pages 777-793.
  3. Tirole, Jean, 1986. "Procurement and Renegotiation," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 235-259, April.
  4. Georg Nöldeke & Klaus M. Schmidt, 1992. "Option Contracts and Renegotiation - A Solution to the Hold-Up Problem," Discussion Paper Serie A 417, University of Bonn, Germany, revised Aug 1993.
  5. F. Gul, 2000. "Unobservable Investment and the Hold-Up Problem," Princeton Economic Theory Papers 00s10, Economics Department, Princeton University.
  6. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, number 9780195115826.
  7. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, September.
  8. Daughety, Andrew & Reinganum, Jennifer, 1992. "Product Safety: Liability, R & D and Signaling," Working Papers 94-17, University of Iowa, Department of Economics, revised 1994.
  9. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
  10. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Scholarly Articles 12375014, Harvard University Department of Economics.
  11. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
  12. Carl Shapiro, 1986. "Investment, Moral Hazard, and Occupational Licensing," Review of Economic Studies, Oxford University Press, vol. 53(5), pages 843-862.
  13. Drew Fudenberg & Jean Tirole, 1988. "Moral Hazard and Renegotiation in Agency Contracts," Working papers 494, Massachusetts Institute of Technology (MIT), Department of Economics.
  14. Williamson, Oliver E, 1983. "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, American Economic Association, vol. 73(4), pages 519-540, September.
  15. Oliver Hart & John Moore, 1985. "Incomplete Contracts and Renegotiation," Working papers 367, Massachusetts Institute of Technology (MIT), Department of Economics.
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