Information Asymmetry and Tie-in Transactions
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Publication date: 2006-08-31
GNPJE 2006;209(7-8):9-25
The article sets out to determine if tie-in transactions can be a more favorable form of buying capital goods for enterprises than ordinary market transactions in the event of an information asymmetry. The authors present a model situation in which an enterprise from a less developed country decides to buy technology from a company based in a highly developed country. The quality of the technology is unknown to the buyer, who has two forms of transactions to choose from: a market transaction or a tie-in. The authors prove that in the event of considerable uncertainty about the quality of the technology involved, tie-ins may be the preferred form of trade. Such transactions play the role of specific insurance in case the technology purchased proves to be of substandard quality. Tie-in transactions are a reliable signal of the quality of capital goods if there is an information asymmetry between the seller and the buyer. They represent a rational response to conditions limiting market exchange.
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