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Abstract

We examine a two-stage selling mechanism design problem, where the buyer makes her report and the seller endogenously decides his effort (hidden investment) to generate a possibly better outside offer. The optimal mechanism shows that the seller’s effort depends on the reported value of the buyer; a higher value lowers the seller’s incentive to invest in the outside offer. After the price of the outside offer is realized, if the buyer’s virtual value is less than the price, the seller takes the outside offer, and a termination fee equal to the virtual value is paid to the buyer.

Publication Type:	Article
Additional Information:	© 2026 The Author(s). International Economic Review published by Wiley Periodicals LLC on behalf of the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association. This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.
Publisher Keywords:	Direct mechanisms; truthful reporting; seller outside offers; termination fees
Subjects:	H Social Sciences > HD Industries. Land use. Labor H Social Sciences > HF Commerce H Social Sciences > HG Finance
Departments:	School of Policy & Global Affairs School of Policy & Global Affairs > Department of Economics
SWORD Depositor:	Symplectic Administrator

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