Accessible Requires Authentication Published by De Gruyter November 6, 2001

Bilateral Trade and Opportunism in a Matching Market

Garey Ramey and Joel Watson

Abstract

We develop a model of bilateral contracting in a dynamic market setting. Asset owners must be paired via a matching process in order to form productive relationships involving long-term investments and ongoing effort. Market frictions shape the owners' incentives to invest in the absence of complete contracts. We identify cases in which there exists an optimal positive level of market friction implementing first-best investment levels. We also endogenize the choice between integrated and nonintegrated organizational forms. Changes in structural variables can induce crashes by disrupting existing relationships.

Published Online: 2001-11-06

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