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Bargaining under the Illusion of Transparency

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  • Kristóf Madarász

Abstract

This paper studies bargaining with noncommon priors where the buyer projects and exaggerates the probability that her private information may leak to the seller. Letting the buyer name her price first, raises the seller's payoff above his payoff from posting a price. In seller-offer bargaining, projection implies a partial reversal of classic Coasian comparative static results. Weakening price commitment can benefit the seller and, as long as the relative speed at which imaginary information versus offers arrive does not converge to zero too quickly, frictionless bargaining converges to a fast haggling process which allows the seller to extract all surplus from trade. Bargaining under common prior transparency is instead slow and becomes equivalent to simply waiting. The comparative static predictions are consistent with experimental evidence.

Suggested Citation

  • Kristóf Madarász, 2021. "Bargaining under the Illusion of Transparency," American Economic Review, American Economic Association, vol. 111(11), pages 3500-3539, November.
    • Handle: RePEc:aea:aecrev:v:111:y:2021:i:11:p:3500-3539
    DOI: 10.1257/aer.20150004
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    More about this item

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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