Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/78430
Authors: 
Lülfesmann, Christoph
Year of Publication: 
2001
Series/Report no.: 
Bonn Econ Discussion Papers 4/2001
Abstract: 
The paper studies a generic bilateral trade model with relationship-specific investments. Only the seller invests, and subsequent trade becomes inefficient if his investments are too low. We show that the seller may defect strategically under a fixed-price contract even though he attains any arbitrary surplus when expending the (second-best) investment. In this case, no general mechanism facilitates trade and the parties should not start their relationship. Also, the defection problem may be more severe when the parties trade after the buyer's valuation has been disclosed, as compared to a situation where the parties have to complete trade under uncertainty.
Subjects: 
Bilateral Trade
Hold-Up
Specific Investments
Incomplete Contracts
JEL: 
D23
H57
L51
Document Type: 
Working Paper

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