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T-Space at The University of Toronto Libraries >
Theoretical Economics >
Volume 1, Number 1 (March 2006) >

Please use this identifier to cite or link to this item: http://hdl.handle.net/1807/10306

Title: Rigidity in bilateral trade with holdup
Authors: Rui R. Zhao; Department of Economics, University at Albany, SUNY
Keywords: 
Bilateral contracting, hidden action and hidden information, holdup problem, nonlinear pricing
C72, D20, D82
Issue Date: 4-Mar-2008
Publisher: Theoretical Economics
Citation: Theoretical Economics; Vol 3, No 1 (2008)
Abstract: [This item is a preserved copy. To view the original, visit http://econtheory.org/] This paper studies bilateral trade in which the seller makes a hidden investment that influences the buyer's hidden valuation. In general it is impossible to implement both first-best efficient trade and efficient investment using budget-balanced trading mechanisms. The paper fully characterizes the constrained efficient contracts. It is shown that the optimal tradeoff between allocative efficiency and incentive provision results in rigidity in trade, the degree of which depends on the seriousness of the holdup problem. Sufficient conditions are also provided for full separation of buyer types to take place in optimal contracts when the holdup problem is not too severe. The seller may overinvest relative to the first best.
URI: http://hdl.handle.net/1807/10306
Other Identifiers: http://econtheory.org/ojs/index.php/te/article/view/20080085
Rights: Authors who publish in <i>Theoretical Economics</i> will release their articles under the <a href="http://creativecommons.org/licenses/by-nc/2.5/">Creative Commons Attribution-NonCommercial license</a>. This license allows anyone to copy and distribute the article for non-commercial purposes provided that appropriate attribution is given.
Appears in Collections:Volume 1, Number 1 (March 2006)

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