Efficient Non-Contractible Investments in Large Economies

Do investors making complementary investments face the correct incen­tives, especially when they cannot contract with each other prior to their de­cisions? We present a two-sided matching model in which buyers and sellers make investments prior to matching. Once matched, buyer and seller bar­ gain over the price, taking into account outside options. Efficient decisions can always be sustained in equilibrium. We characterize the inefficiencies that can arise in equilibrium, and show that equilibria will be constrained efficient. We also show that the degree of diversity in a large market has implications for the extent of any inefficiency.

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