Price-setting Power versus Private Information

Arbeitspapier

This paper investigates the extent of the holdup underinvestment problem in a buyer-seller relationship in which the seller has private information about his alternative trading opportunities. Theory predicts that, compared with a situation in which outside options are publicly observed, the seller obtains an informational rent while the buyer bears an informational loss. As a result the seller is predicted to invest more while the buyer is expected to invest less. In contrast to these predictions, private information appears to have no impact on the investment levels observed in the experiment. A second main finding is that investments do increase with the price-setting power of the investor. Overall the results question some recent theoretical suggestions that private information rents might substitute for price-setting power in mitigating holdup.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Tinbergen Institute Discussion Paper ; No. 03-099/1

Classification and Topics

• Classification: Wirtschaft ; Asymmetric and Private Information; Mechanism Design ; Transactional Relationships; Contracts and Reputation; Networks ; Design of Experiments: Laboratory, Individual
• Subject: holdup ; private information ; outside options ; experiments ; Asymmetrische Information ; Investition ; Investitionsrisiko ; Preis ; Marktmacht ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Sloof, Randolph
• Event: Veröffentlichung
• (who): Tinbergen Institute
• (where): Amsterdam and Rotterdam
• (when): 2003

Further information

• Handle: http://hdl.handle.net/10419/86042