Investments and bargaining in a model with positive consumption externalities

This paper analyzes the investment decisions of the members of a committee when a subsequent bargaining process determines the distribution of a divisible good among them. The shares allocated to investing agents generate positive consumption externalities. We show that agents’ investments improve their bargaining position. This induces rent-seeking behavior that generates a negative external effect on other investing agents. In this setting, the effects of rent-seeking counterbalance the effects of positive consumption externalities so that equilibria may be efficient or display either over- or under-investment.