Investments as Signals of Outside Options

Consider a seller who can make an observable but non-contractible investment to improve an intermediate good that is specialized to a particular buyer's needs. The buyer then makes a take-it-or-leave-it offer to the seller. The seller has private information about the fraction of the ex post surplus that he can realize on his own. Compared to a situation with complete information, additional investment incentives are generated by the seller's desire to pretend a strong outside option. On the other hand, ex post efficiency is not attained whenever the buyer mistakenly tries to call the seller's bluff with a low offer.

[1]  W. Dugger.  The Economic Institutions of Capitalism , 1987 .

[2]  Tracy R. Lewis,et al.  Countervailing incentives in agency problems , 1989 .

[3]  Anjan V. Thakor,et al.  Firms, Contracts and Financial Structures. , 1996 .

[4]  Oliver Hart,et al.  Firms, contracts, and financial structure , 1995 .

[5]  Philippe Choné,et al.  Optimal litigation strategies with observable case preparation , 2010, Games Econ. Behav..

[6]  Ben Lockwood,et al.  Does Asset Ownership Always Motivate Managers? Outside Options and the Property Rights Theory of the Firm , 1998 .

[7]  Jennifer F. Reinganum,et al.  Hidden Talents: Partnerships with Pareto-Improving Private Information , 2006 .

[8]  James M. Malcomson,et al.  Contracts, hold-up and labor markets , 1997 .

[9]  Giovanni Maggi,et al.  On Countervailing Incentives , 1995 .

[10]  Eva I. Hoppe,et al.  Can Contracts Solve the Hold-Up Problem? Experimental Evidence , 2010 .

[11]  Klaus M. Schmidt,et al.  Option Contracts and Renegotiation - A Solution to the Hold-Up Problem , 1995 .

[12]  O. Williamson.  The Theory of the Firm as Governance Structure: From Choice to Contract , 2002 .

[13]  R. Gibbons,et al.  Cheap Talk about Specific Investments , 1995 .

[14]  O. Williamson,et al.  Markets and Hierarchies: Analysis and Antitrust Implications. , 1977 .

[15]  Patrick Gonzalez.  Investment and Screening Under Asymmetric Endogenous Information , 2004 .

[16]  Drew Fudenberg,et al.  Subgame-Perfect Implementation Under Information Perturbations , 2012 .

[17]  S. Reichelstein,et al.  Holdups, Standard Breach Remedies, and Optimal Investment , 1995 .

[18]  Philippe Choné,et al.  Optimal Litigation Strategies with Signaling and Screening , 2008, SSRN Electronic Journal.

[19]  M. Spence.  Signaling in Retrospect and the Informational Structure of Markets , 2002 .

[20]  O. Williamson.  The New Institutional Economics: Taking Stock, Looking Ahead , 2000 .

[21]  O. Hart,et al.  Property Rights and the Nature of the Firm , 1988, Journal of Political Economy.

[22]  Faruk Gul,et al.  Unobservable Investment and the Hold‐Up Problem , 2001 .

[23]  R. Sloof.  Price-setting power versus private information: An experimental evaluation of their impact on holdup , 2008 .

[24]  Susanne Ohlendorf.  Expectation Damages, Divisible Contracts, and Bilateral Investment , 2009 .

[25]  Steven Tadelis,et al.  Incentives Versus Transaction Costs: A Theory of Procurement Contracts , 2001 .

[26]  P. Schmitz.  Information Gathering, Transaction Costs, and the Property Rights Approach , 2005 .

[27]  John Roberts,et al.  The Boundaries of the Firm Revisited , 1998 .

[28]  Bruno Jullien,et al.  Participation Constraints in Adverse Selection Models , 2000, J. Econ. Theory.

[29]  Michael D. Whinston,et al.  On the Transaction Cost Determinants of Vertical Integration , 2003 .

[30]  Silvia Sonderegger,et al.  The role of the agent's outside options in principal-agent relationships , 2010, Games Econ. Behav..

[31]  Jennifer F. Reinganum,et al.  Hidden Talents: Entrepreneurship and Pareto-Improving Private Information , 2009 .

[32]  Jean Tirole,et al.  Incomplete contracts: Where do we stand? , 1999 .

[33]  Oliver Hart,et al.  A Theory of Firm Scope , 2002 .

[34]  B. Klein,et al.  Vertical Integration, Appropriable Rents, and the Competitive Contracting Process , 1978, The Journal of Law and Economics.

[35]  M. Spence.  Job Market Signaling , 1973 .

[36]  Y. Stephen Chiu,et al.  Noncooperative Bargaining, Hostages, and Optimal Asset Ownership , 1998 .

[37]  Bengt Holmstrom.  The Firm as a Subeconomy , 1999 .

[38]  Stephanie Lau.  Information and bargaining in the hold‐up problem , 2008 .

[39]  Andrew M Weiss.  A Sorting-cum-Learning Model of Education , 1983, Journal of Political Economy.

[40]  John. Moore.  Optimal Labour Contracts when Workers have a Variety of Privately Observed Reservation Wages , 1985 .

[41]  Benjamin E. Hermalin,et al.  Toward an Economic Theory of Leadership: Leading by Example , 1997 .