Sunk Investments Lead to Unpredictable Prices

George Mailath, Andrew Postlewaite and Larry Samuelson

American Economic Review, 2004, vol. 94, issue 4, 896-918

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.

Date: 2004
Note: DOI: 10.1257/0002828042002660
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Related works:
Working Paper: Sunk investments lead to unpredictable prices (2003)
Working Paper: Sunk Investments Lead to Unpredictable Prices (2003)
Working Paper: Sunk Investments Lead to Unpredictable Prices (2003)
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