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The Role of Commitment in Bilateral Trade

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Abstract

We examine the buyer-seller problem under different levels of commitment. The seller is informed of the quality of the good, which affects both his cost and the buyer’s valuation, but the buyer is not. We characterize the allocations that can be achieved through mechanisms in which, unlike with full commitment, the buyer has the option to "walk away" after observing a given offer. We further characterize the equilibrium payoffs that can be achieved in the bargaining game in which the seller makes all the offers, as the discount factor goes to one. This allows us to identify how different levels of commitment affect outcomes, and which constraints, if any, preclude efficiency.

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File URL: http://cowles.econ.yale.edu/P/cd/d17b/d1760.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1760.

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Length: 77 pages
Date of creation: May 2010
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Handle: RePEc:cwl:cwldpp:1760

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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Keywords: Bargaining; Mechanism design; Market for lemons;

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References

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  1. Mylovanov, Tymofiy, 2008. "Veto-based delegation," Journal of Economic Theory, Elsevier, vol. 138(1), pages 297-307, January.
  2. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  3. Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, vol. 69(4), pages 1077-98, July.
  4. Ausubel, Lawrence M. & Deneckere, Raymond J., 1989. "A direct mechanism characterization of sequential bargaining with one-sided incomplete information," Journal of Economic Theory, Elsevier, vol. 48(1), pages 18-46, June.
  5. Raymond Deneckere & Meng-Yu Liang, 2006. "Bargaining with Interdependent Values," Econometrica, Econometric Society, vol. 74(5), pages 1309-1364, 09.
  6. Samuelson, William F, 1984. "Bargaining under Asymmetric Information," Econometrica, Econometric Society, vol. 52(4), pages 995-1005, July.
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Cited by:
  1. Braz Camargo & Benjamin Lester, 2011. "Trading dynamics in decentralized markets with adverse selection," Working Papers 11-36, Federal Reserve Bank of Philadelphia.
  2. Itai Sher & Rakesh Vohra, 2011. "Price Discrimination Through Communication," Discussion Papers 1536, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

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