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Sunk Investments Lead to Unpredictable Prices (Second Version)

Author

Listed:
  • George J.Mailath

    (Department of Economics, University of Pennsylvania)

  • Andrew Postlewaite

    (Department of Economics, University of Pennsylvania)

  • Larry Samuelson

    (Department of Economics, University of Wisconsin)

Abstract

We study transactions that require investments before trading in a competitive market, when forward contracts fixing the transaction price are absent. We show that, despite the market being perfectly competitive and subject to arbitrarily little uncertainty, the inability to jointly determine investment levels and prices may make it impossible for buyers and sellers to predict the prices at which they will trade, leading to inefficient levels of investment and trade.

Suggested Citation

  • George J.Mailath & Andrew Postlewaite & Larry Samuelson, 2003. "Sunk Investments Lead to Unpredictable Prices (Second Version)," PIER Working Paper Archive 04-007, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 30 Jan 2004.
    • Handle: RePEc:pen:papers:04-007
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    File URL: https://economics.sas.upenn.edu/sites/default/files/filevault/working-papers/04-007.pdf
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    References listed on IDEAS

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    5. Franklin Allen & Douglas Gale, 2003. "Financial Fragility, Liquidity and Asset Prices," Center for Financial Institutions Working Papers 01-37, Wharton School Center for Financial Institutions, University of Pennsylvania.
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    Cited by:

    1. Jones, Luke R. & Vossler, Christian A., 2014. "Experimental tests of water quality trading markets," Journal of Environmental Economics and Management, Elsevier, vol. 68(3), pages 449-462.

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    Keywords

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    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General

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