IDEAS home Printed from https://ideas.repec.org/p/wop/pennca/eff-inv-large.html
   My bibliography  Save this paper

Efficient Non-Contractible Investments in Large Economies

Author

Abstract

Do investors making complementary investments face the correct incentives, especially when they cannot contract with each other prior to their decisions? We present a two-sided matching model in which buyers and sellers make investments prior to matching. Once matched, buyer and seller bargain over the price, taking into account outside options. Efficient decisions can always be sustained in equilibrium. We characterize the inefficiencies that can arise in equilibrium, and show that equilibria will be constrained efficient. We also show that the degree of diversity in a large market has implications for the extent of any inefficiency.

Suggested Citation

  • Harold L. Cole & George J. Mailath & Andrew Postlewaite, 2000. "Efficient Non-Contractible Investments in Large Economies," CARESS Working Papres eff-inv-large, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
    • Handle: RePEc:wop:pennca:eff-inv-large
    as

    Download full text from publisher

    File URL: http://www.ssc.upenn.edu/~gmailath/wpapers/eff-inv-large.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Michael Kremer, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(3), pages 551-575.
    2. Kamecke, Ulrich, 1992. "On the uniqueness of the solution to a large linear assignment problem," Journal of Mathematical Economics, Elsevier, vol. 21(6), pages 509-521.
    3. Gretsky, Neil E & Ostroy, Joseph M & Zame, William R, 1992. "The Nonatomic Assignment Model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 2(1), pages 103-127, January.
    4. Oliver D. Hart, 1979. "Monopolistic Competition in a Large Economy with Differentiated Commodities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 46(1), pages 1-30.
    5. Bryan Ellickson and Birgit Grodal, Suzanne Scotchmer, and William R. Zame., 1997. "Clubs and the Market: Continuum Economies," Economics Working Papers 97-254, University of California at Berkeley.
    6. Ellickson, Bryan & Grodal, Birgit & Scotchmer, Suzanne & Zame, William R., 2001. "Clubs and the Market: Large Finite Economies," Journal of Economic Theory, Elsevier, vol. 101(1), pages 40-77, November.
    7. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    8. Bryan Ellickson & Birgit Grodal & Suzanne Scotchmer & William R. Zame, 1999. "Clubs and the Market," Econometrica, Econometric Society, vol. 67(5), pages 1185-1218, September.
    9. Makowski, Louis & Ostroy, Joseph M, 1995. "Appropriation and Efficiency: A Revision of the First Theorem of Welfare Economics," American Economic Review, American Economic Association, vol. 85(4), pages 808-827, September.
    10. Kaneko, Mamoru, 1982. "The central assignment game and the assignment markets," Journal of Mathematical Economics, Elsevier, vol. 10(2-3), pages 205-232, September.
    11. Cole Harold Linh & Mailath George J. & Postlewaite Andrew, 2001. "Efficient Non-Contractible Investments in Finite Economies," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 1(1), pages 1-34, March.
    12. Joseph Farrell & Suzanne Scotchmer, 1988. "Partnerships," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(2), pages 279-297.
    13. Daron Acemoglu, 1997. "Training and Innovation in an Imperfect Labour Market," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(3), pages 445-464.
    14. MacLeod, W Bentley & Malcomson, James M, 1993. "Investments, Holdup, and the Form of Market Contracts," American Economic Review, American Economic Association, vol. 83(4), pages 811-837, September.
    15. Ken Burdett & Melvyn G. Coles, 1997. "Marriage and Class," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 141-168.
    16. Ellickson, Bryan & Grodal, Birgit & Scotchmer, Suzanne & Zane, William R., 1997. "clubs and the Market: Large Finite Economies," Department of Economics, Working Paper Series qt10k1b44j, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    17. Cole, Harold L. & Prescott, Edward C., 1997. "Valuation Equilibrium with Clubs," Journal of Economic Theory, Elsevier, vol. 74(1), pages 19-39, May.
    18. Acemoglu, Daron & Shimer, Robert, 1999. "Holdups and Efficiency with Search Frictions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 827-849, November.
    19. Farrell, Joseph & Scotchmer, Suzanne, 1986. "Partnerships," Department of Economics, Working Paper Series qt49d211x4, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    20. Hart, Oliver D., 1980. "Perfect competition and optimal product differentiation," Journal of Economic Theory, Elsevier, vol. 22(2), pages 279-312, April.
    21. Ellickson, Bryan & Grodal, Birgit & Scotchmer, Suzanne & Zame, William R., 1997. "Clubs and the Market: Continuum Economies," Department of Economics, Working Paper Series qt7n5699xj, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    22. Martine Quinzii, 1982. "Core and Competitive Equilibria with Indivisibilities," Cowles Foundation Discussion Papers 644, Cowles Foundation for Research in Economics, Yale University.
    23. Daron Acemoglu, 1996. "A Microfoundation for Social Increasing Returns in Human Capital Accumulation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(3), pages 779-804.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cole, Harold L. & Mailath, George J. & Postlewaite, Andrew, 2001. "Efficient Non-Contractible Investments in Large Economies," Journal of Economic Theory, Elsevier, vol. 101(2), pages 333-373, December.
    2. 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.
    3. Ellickson, Bryan & Grodal, Birgit & Scotchmer, Suzanne & Zane, William R., 1997. "clubs and the Market: Large Finite Economies," Department of Economics, Working Paper Series qt10k1b44j, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    4. Ellickson, Bryan & Grodal, Birgit & Scotchmer, Suzanne & Zame, William R., 2001. "Clubs and the Market: Large Finite Economies," Journal of Economic Theory, Elsevier, vol. 101(1), pages 40-77, November.
    5. 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(4), pages 763-793.
    6. Bhowmik, Anuj & Saha, Sandipan, 2025. "Bargaining-Equilibrium equivalence," Journal of Mathematical Economics, Elsevier, vol. 118(C).
    7. Hans Gersbach & Hans Haller, 2018. "Power at general equilibrium," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 50(3), pages 425-455, March.
    8. Amihai Glazer, 2008. "Bargaining with Rent Seekers," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(5), pages 859-871, October.
    9. Philippe Jehiel & Laurent Lamy, 2018. "A Mechanism Design Approach to the Tiebout Hypothesis," Journal of Political Economy, University of Chicago Press, vol. 126(2), pages 735-760.
    10. John P. Conley & Myrna Holtz Wooders, 1998. "The Tiebout Hypothesis: On the Existence of Pareto Efficient Competitive Equilibrium," Working Papers mwooders-98-06, University of Toronto, Department of Economics.
    11. Allouch, Nizar & Conley, John P. & Wooders, Myrna, 2009. "Anonymous price taking equilibrium in Tiebout economies with a continuum of agents: Existence and characterization," Journal of Mathematical Economics, Elsevier, vol. 45(9-10), pages 492-510, September.
    12. Chakraborty, Archishman & Citanna, Alessandro, 2005. "Occupational choice, incentives and wealth distribution," Journal of Economic Theory, Elsevier, vol. 122(2), pages 206-224, June.
    13. Nizar Allouch & Myrna Wooders, 2004. "Price Taking Equilibrium in Club Economies with Multiple Memberships and Unbounded Club Sizes," Working Papers 513, Queen Mary University of London, School of Economics and Finance.
    14. Hans Gersbach & Hans Haller & Hideo Konishi, 2015. "Household formation and markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 59(3), pages 461-507, August.
    15. Gersbach, Hans & Haller, Hans, 2010. "Club theory and household formation," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 715-724, September.
    16. Scotchmer, Suzanne & Shannon, Chris, 2019. "Verifiability and group formation in markets," Journal of Economic Theory, Elsevier, vol. 183(C), pages 417-477.
    17. Jerez, Belén, 2017. "Competitive search equilibrium with multidimensional heterogeneity and two-sided ex-ante investments," Journal of Economic Theory, Elsevier, vol. 172(C), pages 202-219.
    18. Ricardo J. Caballero & Mohamad L. Hammour, 1998. "The Macroeconomics of Specificity," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 724-767, August.
    19. Manjunath, Vikram, 2016. "Fractional matching markets," Games and Economic Behavior, Elsevier, vol. 100(C), pages 321-336.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wop:pennca:eff-inv-large. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Thomas Krichel (email available below). General contact details of provider: https://edirc.repec.org/data/caupaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.