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Review of Economic Design

, Volume 22, Issue 3–4, pp 123–147 | Cite as

Two-sided unobservable investment, bargaining, and efficiency

  • Erol Akçay
  • Adam MeirowitzEmail author
  • Kristopher W. Ramsay
Original Paper

Abstract

Asymmetric information can lead to inefficient outcomes in many bargaining contexts. It is sometimes natural to think of asymmetric information as emerging from imperfect observation of previously taken actions (e.g., obtaining compliments or substitutes for the item being bargained over). How do such strategic investment choices prior to bargaining interact with the strategic problem of bargaining under private information? We focus on bilateral bargaining when players can make unobserved investments in the value of the item prior to their interaction. With two-sided hidden investment, strategic uncertainty induces a post-investment problem analogous to that in Myerson and Satterthwaite (J Econ Theory 29(2):265–281, 1983), and inefficiencies might be expected to arise. But, there are strong incentives to avoid investment levels that do not lead to trade and this must be anticipated by the other trader. This effect is shown to drive a form of unraveling; as a result in every equilibrium to the larger game the good ends up in the hands of the agent with the higher valuation.

Keywords

Bargaining Strategic uncertainty Hold-up 

JEL Classification

C7 D8 

Notes

Funding

This research was partially funded by NSF Grant EF-1137894.

Compliance with ethical standards

Conflict of interest

The authors declare they have no conflict of interests.

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of BiologyUniversity of PennsylvaniaPhiladelphiaUSA
  2. 2.Department of Finance, David Eccles School of BusinessUniversity of UtahSalt Lake CityUSA
  3. 3.Department of PoliticsPrinceton UniversityPrincetonUSA

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