Template-Type: ReDIF-Paper 1.0
Title: Pre-Trade Private Investments
Author-Name: Francesc Dilmé
Author-Email: fdilme@uni-bonn.de
Classification-JEL: D82, D83, D42, L15
Keywords: Private Investment, Hold Up Problem, Price Dispersion

Abstract: This paper investigates the welfare effects of private investments prior to trade.
A seller of a durable good can privately invest on changing its quality. After the investment, she receives a take-it-or-leave-it offer from a buyer. Both the seller and the
buyer value more goods of higher quality. We obtain that, in equilibrium, the seller
mixes the investment choice, adding adverse selection to the exchange. The nonobservability of the investment lowers the buyer’s payoff without giving the seller
additional rents. Notably, adding buyer competition exacerbates the adverse selection and completely eliminates the trade surplus. Partial observability increases
the equilibrium investment, makes the seller better off, and lowers the payoff of the
buyer.

Note: 
Length: 52
Creation-Date: 2019-03
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp078
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2019_078