Investments as Signals of Outside Options

Patrick Schmitz and Goldlücke, Susanne
Authors registered in the RePEc Author Service: Susanne Goldlücke

No 8366, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Consider a seller who can make an observable but non-contractible investment to improve an intermediate good that is specialized to a particular buyer's 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 seller's desire to pretend a strong outside option. On the other hand, ex post efficiency is not attained whenever the buyer mistakenly tries to call the seller's bluff with a low offer.

Keywords: Hold-up problem; Incomplete contracts; Relationship-specific investments; Signaling games (search for similar items in EconPapers)
JEL-codes: D23 D82 D86 (search for similar items in EconPapers)
Date: 2011-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://cepr.org/publications/DP8366 (application/pdf)

Related works:
Journal Article: Investments as signals of outside options (2014)
Working Paper: Signaling an Outside Option (2009)
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:cpr:ceprdp:8366

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP8366

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().