Cheap Talk About Specific Investments

JOURNAL OF LAW, ECONOMICS, AND ORGANIZATIONS, Vol 11 No 2, Fall 1995

Posted: 25 Aug 1998

See all articles by Joseph Farrell

Joseph Farrell

University of California, Berkeley - Department of Economics

Robert S. Gibbons

Massachusetts Institute of Technology - Sloan School and Department of Economics; National Bureau of Economic Research (NBER)

Abstract

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

Farrell, Joseph and Gibbons, Robert S., Cheap Talk About Specific Investments. JOURNAL OF LAW, ECONOMICS, AND ORGANIZATIONS, Vol 11 No 2, Fall 1995. Available at SSRN: https://ssrn.com/abstract=6661

Joseph Farrell (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-642-9854 (Phone)
510-642-6615 (Fax)

Robert S. Gibbons

Massachusetts Institute of Technology - Sloan School and Department of Economics ( email )

E52-432
MIT
Cambridge, MA 02142
United States
617-253-0283 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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