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Smart Buyers

Mike Burkart

Swedish House of Finance

Samuel Lee

New York University (NYU) - Leonard N. Stern School of Business; European Corporate Governance Institute (ECGI)

September 20, 2013

LSE FMG Discussion Paper No. 696
ECGI - Finance Working Paper No. 326/2012

In many bilateral transactions, the seller fears being underpaid because her outside option is better known to the buyer. We rationalize a variety of observed contracts as solutions to such smart buyer problems. The key to these solutions is to grant the seller upside participation. In contrast, the lemons problem calls for offering the buyer downside protection. Yet in either case, the seller (buyer) receives a convex (concave) claim. Thus, contracts commonly associated with the lemons problem can equally well be manifestations of the smart buyer problem. Though, the two information asymmetries have opposite cross-sectional implications.

Number of Pages in PDF File: 41

Keywords: Bilateral trade, asymmetric information, royalties, cash-equity offers, debt-equity swaps, contingent value rights, commissions, lemons problem

JEL Classification: D82, D86

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Date posted: January 12, 2012 ; Last revised: January 26, 2014

Suggested Citation

Burkart, Mike and Lee, Samuel, Smart Buyers (September 20, 2013). LSE FMG Discussion Paper No. 696; ECGI - Finance Working Paper No. 326/2012. Available at SSRN: http://ssrn.com/abstract=1983500 or http://dx.doi.org/10.2139/ssrn.1983500

Contact Information

Mike C. Burkart
Swedish House of Finance ( email )
Drottninggatan 98
111 60 Stockholm

Samuel Lee (Contact Author)
New York University (NYU) - Leonard N. Stern School of Business ( email )
44 West 4th Street
New York, NY NY 10012
United States
European Corporate Governance Institute (ECGI) ( email )
B-1050 Brussels
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