Investments as signals of outside options

Susanne Goldlücke and Patrick Schmitz

Journal of Economic Theory, 2014, vol. 150, issue C, 683-708

Abstract: Consider a seller who can make an observable but non-contractible investment to improve an intermediate good that is specialized to a particular buyerʼs needs. The buyer then makes a take-it-or-leave-it offer to the seller. The seller has private information about the fraction of the ex post surplus that he can realize on his own. Compared to a situation with complete information, additional investment incentives are generated by the sellerʼs desire to pretend a strong outside option. On the other hand, ex post efficiency is not attained since asymmetric information at the bargaining stage sometimes leads to inefficient separations.

Keywords: Incomplete contracts; Relationship-specific investments; Hold-up problem; Signaling games (search for similar items in EconPapers)
JEL-codes: D23 D82 D86 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)

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Related works:
Working Paper: Investments as Signals of Outside Options (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:150:y:2014:i:c:p:683-708

DOI: 10.1016/j.jet.2013.12.001

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