Sunk Investments Lead to Unpredictable Prices

George Mailath, Andrew Postlewaite and Larry Samuelson ()
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Larry Samuelson: Department of Economics, University of Wisconsin-Madison

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We study transactions that require investments before trading in a competitive market, when forward contracts fixing the transaction price are absent. We show that, despite the market being perfectly competitive and subject to arbitrarily little uncertainty, the inability to jointly determine investment levels and prices may make it impossible for buyers and sellers to predict the prices at which they will trade, leading to inefficient levels of investment and trade.

Keywords: General equilibrium; sunspots; incomplete markets (search for similar items in EconPapers)
JEL-codes: D50 D51 D91 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2003-06-03
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Related works:
Journal Article: Sunk Investments Lead to Unpredictable Prices (2004)
Working Paper: Sunk investments lead to unpredictable prices (2003)
Working Paper: Sunk Investments Lead to Unpredictable Prices (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:03-014

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