To invest or screen efficiently: a potential conflict in relationships governed by incomplete contracts
Date
2001
Authors
Bac, M.
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Advisor
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Instructor
Source Title
International Journal of Industrial Organization
Print ISSN
0167-7187
Electronic ISSN
Publisher
Elsevier BV
Volume
19
Issue
3-4
Pages
567 - 588
Language
English
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Journal Title
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Abstract
We consider a dynamic trade relationship where quality is not contractible and potential sellers retain quality-relevant private information. We show that the presence of an investment technology to improve the incumbent seller's innate quality may impair the efficiency of the screening process. If the conflict is effective, the buyer has to induce an inefficient screening process or reduce the productivity of the investment technology. This conflict suggests that the hold-up problem may be more severe than predicted by models of incomplete contracts that assume complete information. © Elsevier Science B.V.