Pre-trade private investments

Francesc Dilme

Games and Economic Behavior, 2019, vol. 117, issue C, 98-119

Abstract: This paper investigates the welfare effects of private investments prior to trade. A seller of a durable good can privately invest on changing its quality. After the investment, she receives a take-it-or-leave-it offer from a buyer. Both the seller and the buyer value more goods of higher quality. We obtain that, in equilibrium, the seller mixes the investment choice, adding adverse selection to the exchange. The non-observability of the investment diminishes the buyer's payoff without giving the seller additional rents. Notably, adding buyer competition exacerbates the adverse selection and completely eliminates the trade surplus. Partial observability increases the equilibrium investment, makes the seller better off, and reduces the payoff of the buyer.

Keywords: Private investment; Hold up problem; Price dispersion (search for similar items in EconPapers)
JEL-codes: D42 D82 D83 L15 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0899825619300806
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Pre-Trade Private Investments (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:117:y:2019:i:c:p:98-119

DOI: 10.1016/j.geb.2019.05.008

Access Statistics for this article

Games and Economic Behavior is currently edited by E. Kalai

More articles in Games and Economic Behavior from Elsevier
Bibliographic data for series maintained by Catherine Liu ().