Pre-Trade Private Investments

Francesc Dilme

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

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 nonobservability of the investment lowers 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 lowers 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)
Pages: 52
Date: 2019-03
New Economics Papers: this item is included in nep-com and nep-mic
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Citations: View citations in EconPapers (3)

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Journal Article: Pre-trade private investments (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2019_078

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