Investments as Signals of Outside Options

41 Pages Posted: 4 May 2011

See all articles by Susanne Goldlücke

Susanne Goldlücke

University of Mannheim

Patrick W. Schmitz

University of Cologne; Centre for Economic Policy Research (CEPR)

Date Written: April 2011

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: hold-up problem, incomplete contracts, relationship-specific investments, signaling games

JEL Classification: D23, D82, D86

Suggested Citation

Goldlücke, Susanne and Schmitz, Patrick W., Investments as Signals of Outside Options (April 2011). CEPR Discussion Paper No. DP8366. Available at SSRN: https://ssrn.com/abstract=1830984

Susanne Goldlücke (Contact Author)

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Patrick W. Schmitz

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://schmitz.uni-koeln.de/index.php?s=mitarbeiter&t=schmitz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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