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Investments as Signals of Outside Options

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  • Goldlücke, Susanne
  • Schmitz, Patrick W

Abstract

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.

Suggested Citation

  • Goldlücke, Susanne & Schmitz, Patrick W, 2011. "Investments as Signals of Outside Options," CEPR Discussion Papers 8366, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8366
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    Citations

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    Cited by:

    1. Gea M. Lee & Seung Han Yoo, 2013. "Unobserved Investment, Signaling, and Welfare," Discussion Paper Series 1301, Institute of Economic Research, Korea University, revised 2017.
    2. repec:eee:indorg:v:52:y:2017:i:c:p:133-164 is not listed on IDEAS
    3. repec:eee:gamebe:v:104:y:2017:i:c:p:706-725 is not listed on IDEAS
    4. Kusterer, David J. & Schmitz, Patrick W., 2017. "The management of innovation: Experimental evidence," Games and Economic Behavior, Elsevier, vol. 104(C), pages 706-725.
    5. Schmitz, Patrick W., 2012. "Public goods and the hold-up problem under asymmetric information," Economics Letters, Elsevier, vol. 117(3), pages 642-645.
    6. Schmitz, Patrick W., 2015. "Government versus private ownership of public goods: The role of bargaining frictions," Journal of Public Economics, Elsevier, vol. 132(C), pages 23-31.
    7. Schmitz, Patrick W., 2017. "Incomplete contracts, shared ownership, and investment incentives," Journal of Economic Behavior & Organization, Elsevier, vol. 144(C), pages 153-165.
    8. Müller, Daniel & Schmitz, Patrick W., 2016. "Transaction costs and the property rights approach to the theory of the firm," European Economic Review, Elsevier, vol. 87(C), pages 92-107.
    9. repec:eee:ecolet:v:159:y:2017:i:c:p:96-99 is not listed on IDEAS
    10. Rao, Neel, 2015. "General training in labor markets: Common value auctions with unobservable investment," Journal of Economic Behavior & Organization, Elsevier, vol. 120(C), pages 19-45.
    11. Schmitz, Patrick W., 2017. "Asymmetric information and the property rights approach to the theory of the firm," Economics Letters, Elsevier, vol. 159(C), pages 96-99.
    12. Gick, Wolfgang, 2015. "A Theory of Delegated Contracting," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113069, Verein für Socialpolitik / German Economic Association.
    13. Schmitz, Patrick W., 2014. "Optimal ownership of public goods reconsidered," Economics Letters, Elsevier, vol. 125(1), pages 21-24.

    More about this item

    Keywords

    hold-up problem; incomplete contracts; relationship-specific investments; signaling games;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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