Specific Investment, Absence of Commitment and Observability

Patrick Gonzalez ()

Working Papers from Laval - Recherche en Energie

Abstract: I consider the problem of the design of an optimal self-selection contract scheme for a principal who is buying a good from an agent which has the opportunity of making a cost-reducing unobservable investment prior to the contracting stage. Because of a hold-up problem, the agent will randomizes on his investment level. This forces the principal to spend informational "rents" to achieve screening. In equilibrium, these "rents" match the investment costs and the resulting contract yields a price schedule such that the marginal revenue of the agent equals his long run marginal cost curve. Since the agent's "type" is an endogenously determined characteristic, I argue that informational "rents" should be interpreted as quasi-rents that stand as a payment factor for investment.

Keywords: INVESTMENTS; CONTRACTS (search for similar items in EconPapers)
JEL-codes: D42 D82 L51 (search for similar items in EconPapers)
Pages: 31 pages
Date: 1999
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Working Paper: Specific Investment, Absence of Commitment and Observability (1999)
Working Paper: Specific Investment, Absence of Commitment and Observability (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:fth:lavaen:99-03

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