Information Rent and the Holdup Problem: Is Private Information Prior to Investment Valuable?

Michaela Erbenova () and Steinar Vagstad

No 88, CESifo Working Paper Series from CESifo

Abstract: Consider a principal-agent model in which the agent must sink an investment before the contract is written. lf the agent has private information (e.g. about production costs). this may give rise to an information rent that is sometimes large enough to resolve the inherent holdup problem. In this paper the importance of the information t1ming is analyzed. Does it matter whether the agent learns his private information before or alter investment? 'Early' private information has two effects on investments. First, when the agent receives (some) production cost information before investing, then high-cost types of the agent will be less willing to invest than low-cost types. This direct effect will tr igger a signaling effect: if low-cost types invest and high-cost types do not, then investment is a signal of low costs. leading the principal to offer a less favorable contract for the agent. The signaling effect will always increase the holdup problem. while the direct effect may work both ways.

Date: 1995
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