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Smart Buyers

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  • Burkart, Mike
  • Lee, Samuel

Abstract

In many bilateral transactions, the seller fears being underpaid because its outside option is better known to the buyer. We rationalize a variety of observed contracts as solutions to such smart buyer problems. The key to these solutions is to grant the seller upside participation. In contrast, the lemons problem calls for offering the buyer downside protection. Yet in either case, the seller (buyer) receives a convex (concave) claim. Thus, contracts commonly associated with the lemons problem can equally well be manifestations of the smart buyer problem. Nevertheless, the information asymmetries have opposite cross-sectional implications. To avoid underestimating the empirical relevance of adverse selection problems, it is therefore critical to properly identify the underlying information asymmetries in the data.

Suggested Citation

  • Burkart, Mike & Lee, Samuel, 2012. "Smart Buyers," CEPR Discussion Papers 8774, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8774
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    More about this item

    Keywords

    Asymmetric Information; Bilateral trade; Cash-Equity Offers; Commissions; Contingent Value Rights; Debt-Equity Swaps; Lemons Problem; Royalties;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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