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(In)efficiency in private value bargaining with naive players: Theory and experiment

Author

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  • Possajennikov, Alex
  • Saran, Rene

Abstract

The paper investigates two-player double-auction bargaining with private values in a setting with discrete two-point overlapping distributions of traders' valuations. We characterize parameter settings in which there exists a fully efficient equilibrium, and show that if there are traders that behave naively, i.e., set bid or ask equal to their valuation, then there is no equilibrium achieving full efficiency. We conduct an experiment to test the theoretical possibility that the presence of naive traders can reduce efficiency. We find, however, that efficiency is not lower in the presence of naive traders. Subjects mostly set bid/ask prices strategically but they do not coordinate on a fully efficient equilibrium and the extent of strategic behavior is not different in the presence of naive players. We show that a learning model of noisy strategy adjustment explains the observed behavior better than other (equilibrium or non-equilibrium) models.

Suggested Citation

  • Possajennikov, Alex & Saran, Rene, 2023. "(In)efficiency in private value bargaining with naive players: Theory and experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 216(C), pages 42-61.
    • Handle: RePEc:eee:jeborg:v:216:y:2023:i:c:p:42-61
    DOI: 10.1016/j.jebo.2023.10.003
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    More about this item

    Keywords

    Bargaining with private values; Double auction; Efficiency;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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