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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.

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