Sunk Investments Lead to Unpredictable Prices

35 Pages Posted: 4 Jun 2003

See all articles by George J. Mailath

George J. Mailath

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

Andrew Postlewaite

University of Pennsylvania - Department of Economics

Larry Samuelson

Yale University - Department of Economics; Yale University - Cowles Foundation

Date Written: June 3, 2003

Abstract

We study transactions that require investments before trading in a competitive market, when forward contracts fixing the transaction price are absent. We show that, despite the market being perfectly competitive and subject to arbitrarily little uncertainty, the inability to jointly determine investment levels and prices may make it impossible for buyers and sellers to predict the prices at which they will trade, leading to inefficient levels of investment and trade.

Keywords: General Equilibrium, Sunspots, Incomplete Markets

JEL Classification: D50, D51, D91

Suggested Citation

Mailath, George J. and Postlewaite, Andrew and Samuelson, Larry, Sunk Investments Lead to Unpredictable Prices (June 3, 2003). Available at SSRN: https://ssrn.com/abstract=413822 or http://dx.doi.org/10.2139/ssrn.413822

George J. Mailath

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-7908 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://web.sas.upenn.edu/gmailath/

Research School of Economics, ANU ( email )

HW Arndt Building
College of Business and Economics
Canberra, ACT 2601
Australia

Andrew Postlewaite (Contact Author)

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

Larry Samuelson

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States