Smart buyers

Mike Burkart and Samuel Lee

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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: bilateral trade; asymmetric information; royalties; cash-equity offers; debt-equity swaps; contingent value rights; commissions; lemons problems (search for similar items in EconPapers)
JEL-codes: D82 D86 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2012-01-01
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Downloads: (external link)
http://eprints.lse.ac.uk/119056/ Open access version. (application/pdf)

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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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:119056

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