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Efficient Non-Contractible Investments

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  • Harold L. Cole
  • George J. Mailath
  • Andrew Postlewaite

Abstract

This paper addresses the question of whether agents will invest efficiently in attributes that will increase their productivity in subsequent matches with other individuals. We present a two-sided matching model in which buyers and sellers make investment decisions prior to a matching stage. Once matched, the buyer and seller bargain over the transfer price. In contrast to most matching models, preferences over possible matches are affected by decisions made before the matching process. We show that if bargaining respects the existence of outside options (in the sense that the resulting allocation is in the core of the assignment game), then efficient decisions can always be sustained in equilibrium. However, there may also be inefficient equilibria. Our analysis identifies a potential source of inefficiency not present in most matching models.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Harold L. Cole & George J. Mailath & Andrew Postlewaite, "undated". "Efficient Non-Contractible Investments," Penn CARESS Working Papers 08d6793d32cab8f6e1f46dac0, Penn Economics Department.
  • Handle: RePEc:cla:penntw:08d6793d32cab8f6e1f46dac0dbb3611
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    File URL: http://www.econ.upenn.edu/Centers/CARESS/
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    1. Cole Harold Linh & Mailath George J. & Postlewaite Andrew, 2001. "Efficient Non-Contractible Investments in Finite Economies," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 1(1), pages 1-34, March.
    2. Acemoglu, Daron & Shimer, Robert, 1999. "Holdups and Efficiency with Search Frictions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 827-849, November.
    3. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    4. Bryan Ellickson and Birgit Grodal, Suzanne Scotchmer, and William R. Zame., 1997. "Clubs and the Market: Continuum Economies," Economics Working Papers 97-254, University of California at Berkeley.
    5. Joseph Farrell & Suzanne Scotchmer, 1988. "Partnerships," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 279-297.
    6. Daron Acemoglu, 1997. "Training and Innovation in an Imperfect Labour Market," Review of Economic Studies, Oxford University Press, vol. 64(3), pages 445-464.
    7. Makowski, Louis & Ostroy, Joseph M, 1995. "Appropriation and Efficiency: A Revision of the First Theorem of Welfare Economics," American Economic Review, American Economic Association, vol. 85(4), pages 808-827, September.
    8. Michael Kremer, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 551-575.
    9. Ellickson, Bryan & Grodal, Birgit & Scotchmer, Suzanne & Zame, William R., 2001. "Clubs and the Market: Large Finite Economies," Journal of Economic Theory, Elsevier, vol. 101(1), pages 40-77, November.
    10. Ken Burdett & Melvyn G. Coles, 1997. "Marriage and Class," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 141-168.
    11. Kamecke, Ulrich, 1992. "On the uniqueness of the solution to a large linear assignment problem," Journal of Mathematical Economics, Elsevier, vol. 21(6), pages 509-521.
    12. Cole, Harold L. & Prescott, Edward C., 1997. "Valuation Equilibrium with Clubs," Journal of Economic Theory, Elsevier, vol. 74(1), pages 19-39, May.
    13. MacLeod, W Bentley & Malcomson, James M, 1993. "Investments, Holdup, and the Form of Market Contracts," American Economic Review, American Economic Association, vol. 83(4), pages 811-837, September.
    14. Kaneko, Mamoru, 1982. "The central assignment game and the assignment markets," Journal of Mathematical Economics, Elsevier, vol. 10(2-3), pages 205-232, September.
    15. Gretsky, Neil E & Ostroy, Joseph M & Zame, William R, 1992. "The Nonatomic Assignment Model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 2(1), pages 103-127, January.
    16. Bryan Ellickson & Birgit Grodal & Suzanne Scotchmer & William R. Zame, 1999. "Clubs and the Market," Econometrica, Econometric Society, vol. 67(5), pages 1185-1218, September.
    17. Oliver D. Hart, 1979. "Monopolistic Competition in a Large Economy with Differentiated Commodities," Review of Economic Studies, Oxford University Press, vol. 46(1), pages 1-30.
    18. Hart, Oliver D., 1980. "Perfect competition and optimal product differentiation," Journal of Economic Theory, Elsevier, vol. 22(2), pages 279-312, April.
    19. Martine Quinzii, 1982. "Core and Competitive Equilibria with Indivisibilities," Cowles Foundation Discussion Papers 644, Cowles Foundation for Research in Economics, Yale University.
    20. Daron Acemoglu, 1996. "A Microfoundation for Social Increasing Returns in Human Capital Accumulation," The Quarterly Journal of Economics, Oxford University Press, vol. 111(3), pages 779-804.
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