American Economic Review Vol. 94 No. 4 2004

Sunk Investments Lead to Unpredictable Prices

George J. Mailath¹; Andrew Postlewaite¹; Larry Samuelson²

¹ Department of Economics, 3718 Locust Walk, University of Pennsylvania, Philadelphia, PA 19104. · ² Department of Economics, University of Wisconsin, 1180 Observatory Drive, Madison, WI 53706.

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.

DOI

10.1257/0002828042002660

Volume

94

Issue

4

Pages

896-918

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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