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 C.E.P.R. Discussion Papers

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)

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