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Investments as Signals of Outside Options

  • Goldlücke, Susanne
  • Schmitz, Patrick W

Consider a seller who can make an observable but non-contractible investment to improve an intermediate good that is specialized to a particular buyer's needs. The buyer then makes a take-it-or-leave-it offer to the seller. The seller has private information about the fraction of the ex post surplus that he can realize on his own. Compared to a situation with complete information, additional investment incentives are generated by the seller's desire to pretend a strong outside option. On the other hand, ex post efficiency is not attained whenever the buyer mistakenly tries to call the seller's bluff with a low offer.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8366.

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Date of creation: Apr 2011
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Handle: RePEc:cpr:ceprdp:8366
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