Efficient Non-Contractible Investments

Posted: 19 Aug 2008

See all articles by Harold L. Cole

Harold L. Cole

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

George J. Mailath

University of Pennsylvania - Department of Economics; Research School of Economics, ANU

Andrew Postlewaite

University of Pennsylvania - Department of Economics

Date Written: August 1998

Abstract

This paper addresses the question of whether agents will invest efficiently in attributes that will increase their productivity in subsequent matches with other individuals. We present a two-sided matching model in which buyers and sellers make investment decisions prior to a matching stage. Once matched, the buyer and seller bargain over the transfer price. In contrast to most matching models, preferences over possible matches are affected by decisions made before the matching process. We show that if bargaining respects the existence of outside options (in the sense that the resulting allocation is in the core of the assignment game), then efficient decisions can always be sustained in equilibrium. However, there may also be inefficient equilibria. Our analysis identifies a potential source of inefficiency not present in most matching models.

Keywords: Matching Models, Investment, Hold-up Problems, Contracting

JEL Classification: D2, D52, C7

Suggested Citation

Cole, Harold L. and Mailath, George J. and Postlewaite, Andrew, Efficient Non-Contractible Investments (August 1998). Available at SSRN: https://ssrn.com/abstract=1229162

Harold L. Cole (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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George J. Mailath

University of Pennsylvania - Department of Economics ( email )

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Research School of Economics, ANU ( email )

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Andrew Postlewaite

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-7350 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://www.econ.upenn.edu/~apostlew

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