Bargaining, Competition, and Efficient Investment

Abstract

This paper explores the interplay between choice of investment type (specific vs. general), bargaining extensive form and endogenous outside options in the framework of incomplete contracts introduced formally in the work of Grossman, Hart and Moore. We find that the bargaining procedure chosen has significant implications for choice of investment and for the usefulness of the assignment of property rights in enhancing efficiency. Somewhat paradoxically an “auction-like” procedure might need the correct assignment of property rights for a more efficient solution while a sequential offers procedure might do as well as the best assignment of property rights.