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Universität zu Köln
Wirtschafts- und Sozialwissenschaftliche Fakultät

Staatswissenschaftliches Seminar - Prof. Schmitz

Investments as Signals of Outside Options

Susanne Goldlücke and Patrick W. Schmitz

Journal of Economic Theory, Vol. 150, 2014, 683–708.

Abstract. 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.

The working paper version is available for download (CEPR Discussion Paper 8366).

The paper is available for download.