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Inefficiency in a Bilateral Trading Problem with Cooperative Investment

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  • Hori, Kazumi
  • 堀, 一三

Abstract

A bilateral trading model with investment is considered. In a "cooperative" investment version of the model, the seller's investment stochastically determines the buyer's valuation of the good. The value and cost of the good are realized only after the investment is made, and the investment level and the realization of the good's value and cost are private information. I show that, under these assumptions, no contract made before the investment can simultaneously induce efficient investment and efficient ex post trade when the buyer's type is continuously distributed. This inefficiency result contrasts sharply with the efficiency result under the standard "selfish" investment model, where the seller's investment stochastically determines the seller's cost.
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Suggested Citation

  • Hori, Kazumi & 堀, 一三, 2005. "Inefficiency in a Bilateral Trading Problem with Cooperative Investment," Discussion Papers 2005-02, Graduate School of Economics, Hitotsubashi University.
    • Handle: RePEc:hit:econdp:2005-02
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    References listed on IDEAS

    as
    1. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
    2. Schmitz, Patrick W., 2002. "On the Interplay of Hidden Action and Hidden Information in Simple Bilateral Trading Problems," Journal of Economic Theory, Elsevier, vol. 103(2), pages 444-460, April.
    3. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March.
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    6. Schmitz, Patrick W., 2002. "Simple contracts, renegotiation under asymmetric information, and the hold-up problem," European Economic Review, Elsevier, vol. 46(1), pages 169-188, January.
    7. Georg Noldeke & Klaus M. Schmidt, 1995. "Option Contracts and Renegotiation: A Solution to the Hold-Up Problem," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 163-179, Summer.
    8. Akira Konakayama & Toshihide Mitsui & Shinichi Watanabe, 1986. "Efficient Contracting with Reliance and a Damage Measure," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 450-457, Autumn.
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    Citations

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    Cited by:

    1. José De Sousa & Xavier Fairise, 2009. "Do we need handshakes to cooperate in buyer-supplier relationships?," Documents de recherche 09-15, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    2. Bester, Helmut & Krähmer, Daniel, 2012. "Exit options in incomplete contracts with asymmetric information," Journal of Economic Theory, Elsevier, vol. 147(5), pages 1947-1968.
    3. Krähmer, Daniel, 2012. "Auction design with endogenously correlated buyer types," Journal of Economic Theory, Elsevier, vol. 147(1), pages 118-141.
    4. Vasconcelos, Luís, 2014. "Contractual signaling, relationship-specific investment and exclusive agreements," Games and Economic Behavior, Elsevier, vol. 87(C), pages 19-33.
    5. Maria Goltsman, 2011. "Optimal information transmission in a holdup problem," RAND Journal of Economics, RAND Corporation, vol. 42(3), pages 495-526, September.
    6. Guillem Roig, 2022. "The value of investment in nonexclusive contracts," Economic Inquiry, Western Economic Association International, vol. 60(3), pages 1018-1037, July.
    7. , R., 2008. "Rigidity in bilateral trade with holdup," Theoretical Economics, Econometric Society, vol. 3(1), March.
    8. Kazumi Hori, 2014. "Contracting for Multiple Goods under Asymmetric Information: The Two-goods Case," KIER Working Papers 888, Kyoto University, Institute of Economic Research.
    9. Roig, Guillem, 2014. "What Determines Market Structure? An Explanation from Cooperative Investment with Non‐Exclusive Co," TSE Working Papers 14-482, Toulouse School of Economics (TSE).

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    More about this item

    Keywords

    Bilateral Trading; Cooperative Investment; Contracts;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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