Publication Date: October 2015
We analyze a model in which agents make investments and then match into pairs to create a surplus. The agents can make transfers to reallocate their pretransfer ownership claims on the surplus. Mailath, Postlewaite and Samuelson (2013) showed that when investments are unobservable, equilibrium investments are generally ineﬀicient. In this paper we work with a more structured model that is suﬀiciently tractable to analyze the nature of the investment ineﬀiciencies. We provide conditions under which investment is ineﬀiciently high or low and conditions under which changes in the pretransfer ownership claims on the surplus will be Pareto improving, as well as examine how the degree of heterogeneity on either side of the market aﬀects investment eﬀiciency.
Matching, investments, Premuneration values, Underinvestment, Transfers
JEL Classification Codes: C7, D4