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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.

Suggested Citation

  • Harold L. Cole & George J. Mailath & Andrew Postlewaite, 1998. "Efficient non-contractible investments," Staff Report 253, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:253
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    References listed on IDEAS

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    Cited by:

    1. Ed Hopkins, 2012. "Job Market Signaling Of Relative Position, Or Becker Married To Spence," Journal of the European Economic Association, European Economic Association, vol. 10(2), pages 290-322, April.
    2. Matthew J. Baker & Joyce P. Jacobsen, 2007. "Marriage, Specialization, and the Gender Division of Labor," Journal of Labor Economics, University of Chicago Press, vol. 25, pages 763-793.
    3. Leonardo Felli & Kevin Roberts, 2016. "Does Competition Solve the Hold-up Problem?," Economica, London School of Economics and Political Science, vol. 83(329), pages 172-200, January.
    4. Michael Peters & Aloysius Siow, 2002. "Competing Premarital Investments," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 592-608, June.
    5. Ximena Peña, 2006. "Assortative Matching and the Education Gap," BORRADORES DE ECONOMIA 002032, BANCO DE LA REPÚBLICA.
    6. Ramya Sundaram, 2000. "Multiple Traits in the Marriage Market: Does Diversity Sometimes Win?," Econometric Society World Congress 2000 Contributed Papers 1666, Econometric Society.
    7. Heidrun C. Hoppe & Benny Moldovanu & Aner Sela, 2009. "The Theory of Assortative Matching Based on Costly Signals," Review of Economic Studies, Oxford University Press, vol. 76(1), pages 253-281.
    8. Shingo Ishiguro, 2010. "Holdup, search, and inefficiency," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 44(2), pages 307-338, August.
    9. Espen R. Moen & Åsa Rosén, 2004. "Does Poaching Distort Training?," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 1143-1162.
    10. George J. Mailath & Volker Nocke & Andrew Postlewaite, 2004. "Business Strategy, Human Capital, and Managerial Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(4), pages 617-633, December.
    11. Jansen, Marcel, 2003. "Can job competition prevent hold-ups?," UC3M Working papers. Economics we035120, Universidad Carlos III de Madrid. Departamento de Economía.
    12. Sergei Severinov & Michael Peters, 2004. "Internet Trading Mechanisms And Rational Expectations," Econometric Society 2004 North American Winter Meetings 551, Econometric Society.
    13. Francesca Flamini, 2002. "Dynamic Accumulation in Bargaining Games," Working Papers 2002_5, Business School - Economics, University of Glasgow.
    14. Yeon-Koo Che & Ian Gale, 2003. "Optimal Design of Research Contests," American Economic Review, American Economic Association, pages 646-671.
    15. Coles, Melvyn & Francesconi, Marco, 2007. "On the Emergence of Toyboys: Equilibrium Matching with Ageing and Uncertain Careers," IZA Discussion Papers 2612, Institute for the Study of Labor (IZA).

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    Keywords

    Investments ; Game theory;

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