Bargaining under Incomplete Information, Fairness, and the Hold-Up Problem

Ferdinand von Siemens

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: In the hold-up problem incomplete contracts cause the proceeds of relation-specific investments to be allocated by ex-post bargaining. The present paper investigates the efficiency of incomplete contracts if individuals have heterogeneous preferences implying heterogeneous bargaining behavior and - equally important - preferences are private information. As the sunk investment costs can thus potentially signal preferences, they can influence beliefs and consequently bargaining outcomes. The necessities of signalling are shown to generate very strong investment incentives. These incentives are based on the desire not to reveal information that is unfavorable in the ensuing bargaining. After finding all perfect Bayesian equilibria in pure strategies, the paper derives the necessary and sufficient conditions under which it is optimal to invest and trade efficiently.

Keywords: Incomplete Contracts; Hold-Up; Fairness; Bargaining under Incomplete Information; Signalling (search for similar items in EconPapers)
JEL-codes: C70 D23 D63 D82 J33 K12 L22 (search for similar items in EconPapers)
Date: 2005-02
New Economics Papers: this item is included in nep-law and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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