Efficient non-contractible investments

Harold Cole (), George J. Mailath () and Andrew Postlewaite ()

No 253, Staff Report from Federal Reserve Bank of Minneapolis

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.

Keywords: Investments; Game theory (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic
Date: 1998
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Working Paper: Efficient Non-Contractible Investments
Working Paper: Efficient Non-Contractible Investments'
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