Sunk Investments Lead to Unpredictable Prices

S-Tier
Journal: American Economic Review
Year: 2004
Volume: 94
Issue: 4
Pages: 896-918

Score contribution per author:

2.681 = (α=2.01 / 3 authors) × 4.0x S-tier

α: calibrated so average coauthorship-adjusted count equals average raw count

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.

Technical Details

RePEc Handle
repec:aea:aecrev:v:94:y:2004:i:4:p:896-918
Journal Field
General
Author Count
3
Added to Database
2026-01-25