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Specific Investment, Absence of Commitment and Observability

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  • Patrick González

Abstract

I consider the problem of the design of an optimal self-selecting contract scheme for a principal who is buying a good from an agent which has the opportunity of making a cost-reducing unobservable investment prior to the contracting stage. Because of a hold-up problem, the agent will randomize on his investment level. This forces the principal to spend informational rents to achieve screening. In equilibrium, these rents match the investment costs and the resulting contract yields a price schedule such that the marginal revenue of the agent equals his long run marginal cost curve. Since the agent's type is an endogenously determined characteristic, I argue that informational rents should be interpreted as quasi-rents that stand as a payment factor for investment. Dans cet article, je considère le problème de l'élaboration d'un contrat auto-sélecteur pour un principal qui achète un bien d'un agent, lequel est en mesure d'effectuer un investissement réduisant ses coûts de production avant l'étape contractuelle. Ceci crée une situation de hold-up de laquelle l'agent se protège en choisissant son niveau d'investissement de manière aléatoire. En retour, cet aléa incite le principal à concéder des rentes informationnelles à l'agent afin qu'il révèle son type. ¸ l'équilibre, le montant de ces rentes équivaut au coût de l'investissement et le contrat exhibe une politique de prix telle que le revenu marginal de l'agent correspond à sa courbe de coût marginal de long terme. Puisque le type de l'agent, dans ce modèle, est une variable endogène, je soutiens l'idée que les rentes devraient être interprétées comme des quasi-rentes compensant l'agent pour ses coûts d'investissement.

Suggested Citation

  • Patrick González, 1999. "Specific Investment, Absence of Commitment and Observability," CIRANO Working Papers 99s-06, CIRANO.
  • Handle: RePEc:cir:cirwor:99s-06
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    File URL: http://www.cirano.qc.ca/files/publications/99s-06.pdf
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    References listed on IDEAS

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    1. 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, January.
    2. Jonathan Thomas & Tim Worrall, 1994. "Foreign Direct Investment and the Risk of Expropriation," Review of Economic Studies, Oxford University Press, vol. 61(1), pages 81-108.
    3. William P. Rogerson, 1992. "Contractual Solutions to the Hold-Up Problem," Review of Economic Studies, Oxford University Press, vol. 59(4), pages 777-793.
    4. Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November.
    5. Tirole, Jean, 1986. "Procurement and Renegotiation," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 235-259, April.
    6. 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.
    7. Williamson, Oliver E, 1983. "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, American Economic Association, vol. 73(4), pages 519-540, September.
    8. Choi, Yongjae & Esfahani, Hadi Salehi, 1998. "Direct foreign investment and expropriation incentives: A mitigating role for match-specific capital," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(1), pages 47-59.
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    Cited by:

    1. AGRELL, Per & KASPERZEC, Roman, 2010. "Dynamic joint investments in supply chains under information asymmetry," CORE Discussion Papers 2010085, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

    More about this item

    Keywords

    Specific investment; hold-up; observability; mechanism design; renegotiation; Investissement spécifique; hold-up; observabilité; design de mécanisme; renégociation;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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