DP6988 | Information Gathering and the Hold-Up Problem in a Complete Contracting Framework

Author(s)

Publication Date

23/10/2008

JEL Code(s)

Keyword(s)

Programme Area(s)

Abstract

In a complete contracting model, a risk-neutral seller exerts effort while producing a good. Effort is a hidden action and stochastically influences the risk-neutral buyer's valuation. Then the buyer can gather private information about his valuation. The ex ante optimal contract may encourage information gathering, even though it is commonly known that it is ex post efficient to trade regardless of the buyer's valuation (so that information gathering is a strategic, unproductive rent-seeking activity). Information gathering occurs even more often if it is a verifiable action.