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Smart Buyers

Mike Burkart () and Samuel Lee ()

FMG Discussion Papers from Financial Markets Group

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 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.

Date: 2012-01
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Related works:
Journal Article: Smart Buyers (2016) Downloads
Working Paper: Smart buyers (2016) Downloads
Working Paper: Smart Buyers (2012) Downloads
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