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Smart buyers

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  • Burkart, Mike
  • Lee, Samuel

Abstract

In many bilateral transactions, the seller fears being underpaid because its outside option is better known to the buyer. We rationalize a variety of observed contracts as solutions to such smart buyer problems. The key to these solutions is to grant the seller upside participation. In contrast, the lemons problem calls for offering the buyer downside protection. Yet in either case, the seller (buyer) receives a convex (concave) claim. Thus, contracts commonly associated with the lemons problem can equally well be manifestations of the smart buyer problem. Nevertheless, the information asymmetries have opposite cross-sectional implications. To avoid underestimating the empirical relevance of adverse selection problems, it is therefore critical to properly identify the underlying information asymmetries in the data.

Suggested Citation

  • Burkart, Mike & Lee, Samuel, 2012. "Smart buyers," LSE Research Online Documents on Economics 119056, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:119056
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    File URL: http://eprints.lse.ac.uk/119056/
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    More about this item

    Keywords

    bilateral trade; asymmetric information; royalties; cash-equity offers; debt-equity swaps; contingent value rights; commissions; lemons problems;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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