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Cake-Eating with Private Information

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  • Reyer Gerlagh
  • Matti Liski

Abstract

We consider a model of cake-eating with private information. The model captures phenomena such as trust and “security of supply” in resource-use relationships. It also predicts supply shocks as an equilibrium phenomenon: privately informed sellers have incentives to reveal resource scarcity too late, through a supply disruption, after which they exploit the consumers’ inability to immediately adjust demand. Two puzzles that a standard exhaustible-resource theory cannot explain are resolved: sellers have an incentive to overstate their resources rather than emphasize scarcity, and consumers can switch to alternatives before exhausting the resource thereby leaving socially valuable resource in the ground.

Suggested Citation

  • Reyer Gerlagh & Matti Liski, 2014. "Cake-Eating with Private Information," CESifo Working Paper Series 5050, CESifo.
    • Handle: RePEc:ces:ceswps:_5050
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    More about this item

    Keywords

    exhaustible resources; asymmetric information; resource dependence;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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