Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/336588 
Year of Publication: 
2025
Series/Report no.: 
Discussion Paper No. 538
Publisher: 
Ludwig-Maximilians-Universität München und Humboldt-Universität zu Berlin, Collaborative Research Center Transregio 190 - Rationality and Competition, München und Berlin
Abstract: 
We study a static bilateral trade setting with moral hazard, where a seller privately chooses quality and a buyer may pay to verify it. We show that buyer-side information acquisition can lead to informational hold-up through a mechanism wecall surplus squeezing: precise verification enables the seller to extract all buyer surplus, deterring inspection and causing trade to unravel. When verification is noisy, uncertainty preserves buyer surplus and sustains trade. Our framework highlights how strategic responses to learning can distort investment incentives, offering a new perspective on the limits of information precision in mitigating moral hazard.
Subjects: 
surplus squeeze
informational hold-up
buyer learning
costly information
JEL: 
D82
D83
Document Type: 
Working Paper

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