Citation

Discussion Paper Details

Please find the details for DP8366 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Investments as Signals of Outside Options

Author(s): Susanne Goldlücke and Patrick W. Schmitz

Publication Date: April 2011

Keyword(s): hold-up problem, incomplete contracts, relationship-specific investments and signaling games

Programme Area(s): Industrial Organization

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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8366

Bibliographic Reference

Goldlücke, S and Schmitz, P. 2011. 'Investments as Signals of Outside Options'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8366