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Specific investments in their specialized factors

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Assuming that the owners of labor and capital had to make prior specific investments in their specialized factors, explain the source of "failure"( or Pareto non-optimality) that emerges when the parties do not cooperate prior to participating the production activity. If the specific capital owner becomes the residual claimant (receives the future joint surplus) and hires the labor services, why is it important for the capital owner to contract in advance with the owner of the labor services?

Reference no: EM131207338

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