Surplus Squeeze and Informational Hold-Up

Peter Achim and Willy Lefez
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Peter Achim: University of York
Willy Lefez: HU Berlin

No 538, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: We study a static bilateral trade setting with moral hazard, where a seller privately chooses quality and a buyer may pay to verify it. We show that buyer-side information acquisition can lead to informational hold-up through a mechanism wecall surplus squeezing: precise verification enables the seller to extract all buyer surplus, deterring inspection and causing trade to unravel. When verification is noisy, uncertainty preserves buyer surplus and sustains trade. Our framework highlights how strategic responses to learning can distort investment incentives, offering a new perspective on the limits of information precision in mitigating moral hazard.

Keywords: surplus squeeze; informational hold-up; buyer learning; costly information (search for similar items in EconPapers)
JEL-codes: D82 D83 (search for similar items in EconPapers)
Date: 2025-07-22
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