Sunk Investments Lead to Unpredictable Prices (Second Version)

George Mailath, Andrew Postlewaite and Larry Samuelson ()
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Larry Samuelson: Department of Economics, University of Wisconsin

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

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.

Keywords: Sunk investments; inefficient investments; sunspots; random prices. (search for similar items in EconPapers)
JEL-codes: D40 D50 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2003-06-03, Revised 2004-01-30
New Economics Papers: this item is included in nep-fin and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:04-007

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