General Investments and Outside Options: Some Recent Results Reconsidered∗

Some recent contributions have studied equilibrium ex ante investments by buyers and sellers, followed by matching and bargaining over the match surplus, with diverse findings. This paper sets up a simple model with both matching frictions and costs of switching bargaining partners, which encompasses existing contributions. We show that when switching costs are zero, in the limit as matching frictions go to zero, there are a continuum of equilibria with investment between efficient and hold-up levels, but when switching costs are positive, the unique equilibrium investments are at the hold-up level. Under the same assumptions, the axiomatic approach of Cole, Mailath, and Postlewaite predicts that equilibrium investments will be efficient.