Specific Investment, Absence of Commitment and Observability

Patrick Gonzalez ()

Cahiers de recherche from Université Laval - Département d'économique

Abstract:

I consider the problem of the design of an optimal self-selecting 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: Specific Investment; Hold-up; Observability; Mechanism Design; Renegotiation; investissement spécifique; observabilité; design de mécanisme; renégociation (search for similar items in EconPapers)
JEL-codes: D42 D82 L51 (search for similar items in EconPapers)
Date: 1999
New Economics Papers: this item is included in nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
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:lvl:laeccr:9902

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