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Cake-Eating with Private Information

42 Pages Posted: 24 Nov 2014  

Reyer Gerlagh

Tilburg University - Center and Faculty of Economics and Business Administration

Matti Liski

Aalto University - Department of Economics

Date Written: November 24, 2014

Abstract

We consider a model of cake-eating with private information. The model captures phenomena such as trust and “security of supply” in resource-use relationships. It also predicts supply shocks as an equilibrium phenomenon: privately informed sellers have incentives to reveal resource scarcity too late, through a supply disruption, after which they exploit the consumers’ inability to immediately adjust demand. Two puzzles that a standard exhaustible-resource theory cannot explain are resolved: sellers have an incentive to overstate their resources rather than emphasize scarcity, and consumers can switch to alternatives before exhausting the resource thereby leaving socially valuable resource in the ground.

Keywords: exhaustible resources, asymmetric information, resource dependence

JEL Classification: D400, D900, O330, Q400

Suggested Citation

Gerlagh, Reyer and Liski, Matti, Cake-Eating with Private Information (November 24, 2014). CESifo Working Paper Series No. 5050. Available at SSRN: https://ssrn.com/abstract=2529887

Reyer Gerlagh

Tilburg University - Center and Faculty of Economics and Business Administration ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Matti Liski (Contact Author)

Aalto University - Department of Economics ( email )

PO Box 1210
FI-00101 Helsinki
Finland
+358-9-43138384 (Phone)
+358-9-43138735 (Fax)

HOME PAGE: http://www.hkkk.fi/~liski

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