The Role of Commitment in Bilateral Trade
AbstractThis paper solves for the set of equilibrium payoffs in bargaining with interdependent values when the informed party makes all offers, as discounting vanishes. The seller of a good is informed of its quality, which affects both his cost and the buyer's valuation, but the buyer is not. To characterize this payoff set, we derive an upper bound, using mechanism design with limited commitment. We then prove that this upper bound is tight, by showing that all its extreme points are equilibrium payoffs. Our results shed light on the role of different forms of commitment on the bargaining process. In particular, we show that it is the buyer's inability to commit to a contract before observing the terms of trade that precludes efficiency.
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Bibliographic InfoPaper provided by David K. Levine in its series Levine's Working Paper Archive with number 661465000000000117.
Date of creation: 29 Jul 2010
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Other versions of this item:
- Dino Gerardi & Johannes Horner & Lucas Maestri, 2010. "The Role of Commitment in Bilateral Trade," Cowles Foundation Discussion Papers 1760R, Cowles Foundation for Research in Economics, Yale University, revised Oct 2013.
- Dino Gerardi & Johannes Horner & Lucas Maestri, 2010. "The Role of Commitment in Bilateral Trade," Cowles Foundation Discussion Papers 1760, Cowles Foundation for Research in Economics, Yale University.
- Dino Gerardi & Johannes Horner & Lucas Maestri, 2010. "The Role of Commitment in Bilateral Trade," Carlo Alberto Notebooks 151, Collegio Carlo Alberto.
- C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
- 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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