Strategic Shirking in Bilateral Trade

Christoph Luelfesmann ()
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Christoph Luelfesmann: Simon Fraser University, http://www.econ.sfu.ca/
Authors registered in the RePEc Author Service: Christoph Lülfesmann ()

Discussion Papers from Department of Economics, Simon Fraser University

Abstract: This paper explores a version of the canonical holdup model where agents undertake specific investments prior to their transaction. In this setting, we identify a novel reason for contractual inefficiency. An investing party (here, the seller) may shirk for strategic reasons, in particular, exert an effort so low that subsequent trade becomes inefficient. We first show that under a fixed-price contract which would otherwise be optimal and induce trade, strategic shirking can arise irrespective of the precontracted trade price. We then establish that if strategic shirking arises under a fixed-price contract, no general mechanism exists which restores efficient trade. Finally, we show that the defection issue is more severe when the parties trade after the buyer's valuation was realized, as compared to a scenario where the trade transaction is finalized in a state of uncertainty.

Keywords: Bilateral Trade; Hold-Up; Specific Investments; Shirking. (search for similar items in EconPapers)
JEL-codes: D23 H57 L51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-int
Date: 2007-10

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