Investment incentives in bilateral trading

Stephanie Lau

Games and Economic Behavior, 2011, vol. 73, issue 2, 538-552

Abstract: We characterize the surplus-maximizing trading mechanism under two-sided incomplete information and interim individual rationality, when one party can make a value-enhancing specific investment. This mechanism exhibits a trade-off between providing investment incentives and inducing voluntary participation. We analyze how the trading area of the optimal mechanism is further distorted in order to provide investment incentives. Applications of our main results and the underlying geometric analysis to institutional design issues are also provided.

Keywords: Bilateral trading; k-Double auctions; Incomplete contracts; Investment incentives; Optimal mechanism; Opt-out clause (search for similar items in EconPapers)
JEL-codes: C72 C78 D44 D82 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:73:y:2011:i:2:p:538-552

DOI: 10.1016/j.geb.2011.02.006

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