Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/94183
Authors: 
von Siemens, Ferdinand
Year of Publication: 
2005
Series/Report no.: 
SFB/TR 15 Discussion Paper 57
Abstract: 
In the hold-up problem incomplete contracts cause the proceeds of relation-specific investments to be allocated by ex-post bargaining. The present paper investigates the efficiency of incomplete contracts if individuals have heterogeneous preferences implying heterogeneous bargaining behavior and - equally important - preferences are private information. As the sunk investment costs can thus potentially signal preferences, they can influence beliefs and consequently bargaining outcomes. The necessities of signalling are shown to generate very strong investment incentives. These incentives are based on the desire not to reveal information that is unfavorable in the ensuing bargaining. After finding all perfect Bayesian equilibria in pure strategies, the paper derives the necessary and sufficient conditions under which it is optimal to invest and trade efficiently.
Subjects: 
Incomplete Contracts
Hold-Up
Fairness
Bargaining under Incomplete Information
Signalling
JEL: 
C70
D23
D63
D82
J33
K12
L22
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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