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"Over-Investment in Partially Relationship-Specific Assets"

George Deltas

 

First Author :

George Deltas
Economics
University of Illinois at Urbana-Champaign
1206 S. Sixth Street, M/C 706
Champaign, IL 61820
USA

deltas@uiuc.edu

http://www.staff.uiuc.edu/~deltas/

 
 
Abstract :
 
This paper considers a market in which a firm can engage in partially relationship specific investments. The firm does not have the option to engage in investments that are not at all relationship specific. I show that, in such a setting, equilibrium investment can exceed the socially optimal level. This is contrary to the intuition obtained from standard idiosyncratic (i.e., relationship-specific) investment models, in which the possibility of “hold-up” leads to under-investment.
 
 
Manuscript Received : 2001
Manuscript Published : 2001
 
 
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