Strategic Defection in Bilateral Trade

Arbeitspapier

The paper studies a generic bilateral trade model with relationship-specific investments. Only the seller invests, and subsequent trade becomes inefficient if his investments are too low. We show that the seller may defect strategically under a fixed-price contract even though he attains any arbitrary surplus when expending the (second-best) investment. In this case, no general mechanism facilitates trade and the parties should not start their relationship. Also, the defection problem may be more severe when the parties trade after the buyer's valuation has been disclosed, as compared to a situation where the parties have to complete trade under uncertainty.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bonn Econ Discussion Papers ; No. 4/2001

Classification and Topics

• Classification: Wirtschaft ; Organizational Behavior; Transaction Costs; Property Rights ; National Government Expenditures and Related Policies: Procurement ; Economics of Regulation
• Subject: Bilateral Trade ; Hold-Up ; Specific Investments ; Incomplete Contracts

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Lülfesmann, Christoph
• Event: Veröffentlichung
• (who): University of Bonn, Bonn Graduate School of Economics (BGSE)
• (where): Bonn
• (when): 2001

Further information

• Handle: http://hdl.handle.net/10419/78430
• Last update: 10.03.2025, 11:43 AM CET