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Sunk Investments Lead to Unpredictable PricesGeorge J. MailathUniversity of Pennsylvania - Department of Economics Andrew PostlewaiteUniversity of Pennsylvania - Department of Economics Larry SamuelsonYale University June 3, 2003 PIER Working Paper No. 03-014 Abstract: We study transactions that require investments before trading in a competitive market, when forward contracts fixing the transaction price are absent. We show that, despite the market being perfectly competitive and subject to arbitrarily little uncertainty, the inability to jointly determine investment levels and prices may make it impossible for buyers and sellers to predict the prices at which they will trade, leading to inefficient levels of investment and trade.
Number of Pages in PDF File: 35 Keywords: General Equilibrium, Sunspots, Incomplete Markets JEL Classification: D50, D51, D91 working papers seriesDate posted: June 4, 2003Suggested CitationContact Information
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