Working Paper: CEPR ID: DP8366
Authors: Susanne Goldlcke; Patrick W. Schmitz
Abstract: Consider a seller who can make an observable but non-contractible investment to improve an intermediate good that is specialized to a particular buyer's needs. The buyer then makes a take-it-or-leave-it offer to the seller. The seller has private information about the fraction of the ex post surplus that he can realize on his own. Compared to a situation with complete information, additional investment incentives are generated by the seller's desire to pretend a strong outside option. On the other hand, ex post efficiency is not attained whenever the buyer mistakenly tries to call the seller's bluff with a low offer.
Keywords: holdup problem; incomplete contracts; relationship-specific investments; signaling games
JEL Codes: D23; D82; D86
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Seller's investment level (I) (G31) | Buyer offer (O) (D44) |
| Seller's private information regarding surplus fraction (S) (C29) | Seller's investment level (I) (G31) |
| Seller's investment level (I_low) (G31) | Buyer offer (O_low) (D44) |
| Seller's investment level (I_high) (G24) | Buyer offer (O_high) (D44) |
| Private information (D82) | Overall investments (G31) |
| Buyer offer (with complete information) (D44) | Underinvestment (G31) |