 Strategic Shirking in Bilateral TradeScandinavian Journal of Economics, 2021, vol. 123, issue 4, 1292-1313 Abstract: In this paper, I study bilateral trade, where the seller can undertake specific investments before the binary trade transaction takes place. I identify a novel reason for hold‐up and contractual inefficiency in this canonical setting. The investing party can shirk for strategic reasons; that is, exert an effort so low that trade becomes inefficient and is being rescinded. Under a fixed‐price contract (the second‐best mechanism in the absence of the shirking problem), strategic shirking can arise regardless of the initially contracted trade price. Moreover, if a fixed‐price contract leads to strategic shirking, there exists no general revelation mechanism to restore equilibrium trade. I show that the shirking problem is more severe when the parties trade after having learned the buyer's valuation, as opposed to the case of an “experience good” where trade is finalized before this information materializes. Finally, when both buyer and seller undertake specific investments, shirking and non‐shirking equilibria are shown to coexist. Date: 2021 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:scandj:v:123:y:2021:i:4:p:1292-1313 Ordering information: This journal article can be ordered from Access Statistics for this article Scandinavian Journal of Economics is currently edited by Richard Friberg, Matti Liski and Kjetil Storesletten More articles in Scandinavian Journal of Economics from Wiley Blackwell |
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