Munich Personal RePEc Archive

On contractual solutions to hold-up problems with quality uncertainty and unobservable investments

Schmitz, Patrick W. (2010): On contractual solutions to hold-up problems with quality uncertainty and unobservable investments.

[img]
Preview
PDF
MPRA_paper_23157.pdf

Download (225kB) | Preview

Abstract

A seller and a buyer can write a contract. After that, the seller produces a good. She can influence the expected quality of the good by making unobservable investments. Only the seller learns the realized quality. Finally, trade can occur. It is always ex post efficient to trade. Yet, it may be impossible to achieve the first best, even though the risk-neutral parties are symmetrically informed at the contracting stage and complete contracts can be written. The second best is characterized by distortions that are reminiscent of adverse selection models (i.e., models with precontractual private information but without hidden actions).

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.