Abstract
We show that the underinvestment result in the incomplete contract literature relies on the assumption that either the in vestment is selfish, or the bargaining after the investment has been made is under symmetric information, or both. Contract incompleteness might lead to overinvestment when the investment is unobservable and cooperative (the buyer's value of the good depends on the seller's investment), and the players have asymmetric information during the bargaining (the buyer has private in formation regarding his value for the good). We also show that when the investment is observable but not verifiable, using an option contract might be able to restore efficient investment and amount of trade.
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