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Strategic Defection in Bilateral Trade

  • Christoph Lülfesmann

The paper studies a generic bilateral trade model with relationship-specific investments. Only the seller invests, and subsequent trade becomes inefficient if his investments are too low. We show that the seller may defect strategically under a fixed-price contract even though he attains any arbitrary surplus when expending the (second-best) investment. In this case, no general mechanism facilitates trade and the parties should not start their relationship. Also, the defection problem may be more severe when the parties trade after the buyer's valuation has been disclosed, as compared to a situation where the parties have to complete trade under uncertainty.

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File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse4_2001.pdf
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Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse4_2001.

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Length: 18
Date of creation: Feb 2001
Date of revision:
Handle: RePEc:bon:bonedp:bgse4_2001
Contact details of provider: Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

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