Too much investment? A problem of endogenous outside options

David de Meza and Ben Lockwood

Games and Economic Behavior, 2010, vol. 69, issue 2, 503-511

Abstract: This paper shows that when agents on both sides of the market are heterogeneous, varying in their costs of investment, ex ante investments by firms and workers (or buyers and sellers more generally) may be too high when followed by stochastic matching and bargaining over quasi-rents. The overinvestment is caused by the fact that low-cost agents, by investing more, can increase the value of their outside option and thus shift rent away from high-cost investors. Numerical simulations show that overinvestment can occur given parameter values calibrated to OECD labour markets.

Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0899-8256(09)00214-0
Full text for ScienceDirect subscribers only

Related works:
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:69:y:2010:i:2:p:503-511

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 ().