Cheap Talk About Specific Investments
JOURNAL OF LAW, ECONOMICS, AND ORGANIZATIONS, Vol 11 No 2, Fall 1995
Posted: 25 Aug 1998
We consider a problem in which a buyer has private information about the efficient scale or nature of a relationship-specific investment by a producer. We show that reducing the producer's ex post bargaining power may enhance efficiency by providing incentives for the buyer to reveal his private information before the investment is made. This consideration can outweigh the well known "hold-up" problem that arises if the producer does not have all the bargaining power.
JEL Classification: G00
Suggested Citation: Suggested Citation