Swedish House of Finance; Stockholm School of Economics - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); London School of Economics - Financial Markets (FMG) Group
New York University (NYU) - Leonard N. Stern School of Business; Stanford Institute for Economic Policy Research (SIEPR); 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
Date posted: January 12, 2012 ; Last revised: January 26, 2014
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