Mike Burkart () and
Samuel Lee ()
FMG Discussion Papers from Financial Markets Group
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 o¤ering 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 infor- mation 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 asym- metries in the data.
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Journal Article: Smart Buyers (2016)
Working Paper: Smart buyers (2016)
Working Paper: Smart Buyers (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:fmg:fmgdps:dp696
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