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 Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1760R.
Length: 82 pages
Date of creation: May 2010
Date of revision: Oct 2013
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
Other versions of this item:
- Dino Gerardi & Johannes Horner & Lucas Maestri, 2010. "The Role of Commitment in Bilateral Trade," Levine's Working Paper Archive 661465000000000117, David K. Levine.
- 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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