We study optimal price setting by a monopolist in an infinite horizon model with stochastic costs, moderate inflation, and costly price adjustment. For realistic parameters, chosen to replicate observed frequencies of price changes, the model fits numerically several empirical regularities. In...

We examine the theoretical foundations of the hold-up problem. At a first stage, one agent decides on the level of a relationship specific invesment. There is no contract, so at a second stage the agent must bargain with a trading partner over the surplus generated by the investment. We show...

Payments in kind pose an enduring and empirically important puzzle. The paper provides a formalization of the popular view that payment in kind are due to financial constraints. The key assumption is that buyers' liquidity is private information. Buyers who are financially constrained may prove...

The paper examines the theoretical foundations of the hold-up problem. At a first stage, one agent decides on the level of a relationship-specific investment. There is no contract, so at a second stage the agent must bargain with a trading partner over the surplus that the investment has...

Within a simple formal model, we show that there is a link between workers' consumption patterns and their preferred real wage. A large budget share of illiquid durable consumption goods (such as houses and cars) makes workers more willing to accept a low wage in order to reduce the probability...

Most literature on the hold-up problem starts from the assumption that ex post bargaining outcomes are insensitive to prior investment costs. We argue that this approach is unsatisfactory. If the bargaining procedure is relatively symmetric, it typically admits multiple perfect equilibria, some...

Decentralized government lead to inter-regional externalities. Whereas an integratedjurisdiction solves the externality problem, centralized government entails other costs - in particular a neglect for minority interests. The paper models formally the trade-off between these two forces in...

In a laboratory experiment, we create relationships between pairs of anonymous subjects through a Prisoners' dilemma game. Thereafter the same subjects play a private values bargaining game with or without communication. Communication substantially increases bargaining efficiency among subjects...