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Investments as signals of outside options. (English) Zbl 1296.91250
Summary: 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 since asymmetric information at the bargaining stage sometimes leads to inefficient separations.

91G10 Portfolio theory
91G80 Financial applications of other theories
91A28 Signaling and communication in game theory
91B44 Economics of information
Full Text: DOI
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