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No trade

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  • Carrillo, Juan D.
  • Palfrey, Thomas R.
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    Abstract

    We investigate a common value bilateral bargaining model with two-sided private information and no aggregate uncertainty. A seller owns an asset whose common valuation is a deterministic function of the two traders' private signals. We first establish a no-trade theorem for this environment, and proceed to study the effect of the asset valuation structure and the trading mechanism on extent to which asymmetric information induces individuals to engage in mutually unprofitable exchange. A laboratory experiment is conducted, where trade is found to occur between 19% and 35% of the time, and this depends in systematic ways on both the asset valuation function and the trading mechanism. Both buyers and sellers adapt their strategy to changes in the asset valuation function and to changes in the trading mechanism in clearly identifiable ways. An equilibrium model with naïve belief formation accounts for some of the behavioral findings, but open questions remain.

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    Bibliographic Info

    Article provided by Elsevier in its journal Games and Economic Behavior.

    Volume (Year): 71 (2011)
    Issue (Month): 1 (January)
    Pages: 66-87

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    Handle: RePEc:eee:gamebe:v:71:y:2011:i:1:p:66-87

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    Web page: http://www.elsevier.com/locate/inca/622836

    Related research

    Keywords: Bilateral bargaining Common values Private information No-trade theorem Laboratory experiment;

    References

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    1. Rogers, Brian W. & Palfrey, Thomas R. & Camerer, Colin F., 2009. "Heterogeneous quantal response equilibrium and cognitive hierarchies," Journal of Economic Theory, Elsevier, vol. 144(4), pages 1440-1467, July.
    2. Jehiel, Philippe & Koessler, Frédéric, 2008. "Revisiting games of incomplete information with analogy-based expectations," Games and Economic Behavior, Elsevier, vol. 62(2), pages 533-557, March.
    3. Paul Milgrom & Nancy L.Stokey, 1979. "Information, Trade, and Common Knowledge," Discussion Papers 377R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Lawrence Blume & Tarek Coury & David Easley, 2006. "Information, trade and incomplete markets," Economic Theory, Springer, vol. 29(2), pages 379-394, October.
    5. Peter Cramton & Robert Gibbons & Paul Klemperer, 1985. "Dissolving a Partnership Efficiently," Working papers 406, Massachusetts Institute of Technology (MIT), Department of Economics.
    6. Philippe Jehiel, 2005. "Analogy-Based Expectation Equilibrium," Levine's Bibliography 784828000000000106, UCLA Department of Economics.
    7. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
    8. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
    9. Evans, Robert, 1989. "Sequential Bargaining with Correlated Values," Review of Economic Studies, Wiley Blackwell, vol. 56(4), pages 499-510, October.
    10. Eyster, Erik & Rabin, Matthew, 2002. "Cursed Equilibrium," Department of Economics, Working Paper Series qt7p2911dn, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    11. Vincent, Daniel R., 1989. "Bargaining with common values," Journal of Economic Theory, Elsevier, vol. 48(1), pages 47-62, June.
    12. Morris, Stephen, 1994. "Trade with Heterogeneous Prior Beliefs and Asymmetric Information," Econometrica, Econometric Society, vol. 62(6), pages 1327-47, November.
    13. McKelvey Richard D. & Palfrey Thomas R., 1995. "Quantal Response Equilibria for Normal Form Games," Games and Economic Behavior, Elsevier, vol. 10(1), pages 6-38, July.
    14. Holt, Charles A & Sherman, Roger, 1994. "The Loser's Curse," American Economic Review, American Economic Association, vol. 84(3), pages 642-52, June.
    15. Radner, Roy & Schotter, Andrew, 1989. "The sealed-bid mechanism: An experimental study," Journal of Economic Theory, Elsevier, vol. 48(1), pages 179-220, June.
    16. Juan D. Carrillo & Thomas R. Palfrey, 2009. "The Compromise Game: Two-Sided Adverse Selection in the Laboratory," American Economic Journal: Microeconomics, American Economic Association, vol. 1(1), pages 151-81, February.
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    Cited by:
    1. Joao Correia-da-Silva, 2013. "Impossibility of market division with two-sided private information about production costs," FEP Working Papers 490, Universidade do Porto, Faculdade de Economia do Porto.

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