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Investment incentives in bilateral trading

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  • Lau, Stephanie

Abstract

We characterize the surplus-maximizing trading mechanism under two-sided incomplete information and interim individual rationality, when one party can make a value-enhancing specific investment. This mechanism exhibits a trade-off between providing investment incentives and inducing voluntary participation. We analyze how the trading area of the optimal mechanism is further distorted in order to provide investment incentives. Applications of our main results and the underlying geometric analysis to institutional design issues are also provided.

Suggested Citation

  • Lau, Stephanie, 2011. "Investment incentives in bilateral trading," Games and Economic Behavior, Elsevier, vol. 73(2), pages 538-552.
    • Handle: RePEc:eee:gamebe:v:73:y:2011:i:2:p:538-552
    DOI: 10.1016/j.geb.2011.02.006
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    Cited by:

    1. Patrick W Schmitz, 2022. "How (Not) to Purchase Novel Goods and Services: Specific Performance Versus at-will Contracts," The Economic Journal, Royal Economic Society, vol. 132(647), pages 2563-2577.
    2. Erol Akçay & Adam Meirowitz & Kristopher W. Ramsay, 2018. "Two-sided unobservable investment, bargaining, and efficiency," Review of Economic Design, Springer;Society for Economic Design, vol. 22(3), pages 123-147, December.

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    More about this item

    Keywords

    Bilateral trading; k-Double auctions; Incomplete contracts; Investment incentives; Optimal mechanism; Opt-out clause;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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