Smart Buyers

Mike Burkart and Samuel Lee

No 8774, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In many bilateral transactions, the seller fears being underpaid because its outside option is better known to the buyer. We rationalize a variety of observed contracts as solutions to such smart buyer problems. The key to these solutions is to grant the seller upside participation. In contrast, the lemons problem calls for offering the buyer downside protection. Yet in either case, the seller (buyer) receives a convex (concave) claim. Thus, contracts commonly associated with the lemons problem can equally well be manifestations of the smart buyer problem. Nevertheless, the information asymmetries have opposite cross-sectional implications. To avoid underestimating the empirical relevance of adverse selection problems, it is therefore critical to properly identify the underlying information asymmetries in the data.

Keywords: Asymmetric information; Bilateral trade; Cash-equity offers; Commissions; Contingent value rights; Debt-equity swaps; Lemons problem; Royalties (search for similar items in EconPapers)
JEL-codes: D82 D84 (search for similar items in EconPapers)
Date: 2012-01
New Economics Papers: this item is included in nep-cta and nep-mic
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Related works:
Journal Article: Smart Buyers (2016)
Working Paper: Smart buyers (2016)
Working Paper: Smart buyers (2012)
Working Paper: Smart Buyers (2012)
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