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Bilateral bargaining, unverifiable quality, and options to return


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  • Anke Kessler


  • Christoph Lülfesmann



The paper investigates an alternating-offers bargaining game between a buyer and a seller who face several trading opportunities. These items (goods or services) differ in their non-verifiable quality characteristics which gives rise to a moral hazard problem on the seller's part. For the special case of two goods, we completely characterize the set of subgame-perfect equilibria. We find that the seller always extends an option to return the good, while the buyer may suffer from this warranty. Also, qualitatively different types of equilibrium outcomes occur depending on the parameters of the model: (a) the seller may obtain a larger share of the surplus although the parties ex ante have symmetric bargaining positions, (b) the subgame-perfect equilibrium may entail inefficient trade, and (c) multiple equilibria may exist including equilibria with delay in negotiations. Finally, we analyze a situation where bargaining proceeds after the good was returned which is shown to reestablish uniqueness and efficiency of equilibrium. Copyright Springer-Verlag Berlin/Heidelberg 2004

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 23 (2004)
Issue (Month): 2 (January)
Pages: 395-410

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Handle: RePEc:spr:joecth:v:23:y:2004:i:2:p:395-410

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Keywords: Bilateral bargaining; Unverifiable quality warranties.;


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Cited by:
  1. James Andreoni, 2005. "Trust, Reciprocity, and Contract Enforcement: Experiments on Satisfaction Guaranteed," Levine's Bibliography 666156000000000679, UCLA Department of Economics.
  2. Annen, Kurt, 2013. "Social capital as a substitute for formality: Evidence from Bolivia," European Journal of Political Economy, Elsevier, vol. 31(C), pages 82-92.


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