Divide and Learn: Early Contracting with Endogenous Threat
AbstractAn economic agent may engage into an early negotiation with the sole pur- pose of gathering information to improve his bargaining position. We analyze this issue in the context of a buyer/seller relationship, where the seller has private information on the future gains from trade, and the buyer can bypass at some preliminary stage. While both players can wait until uncertainty is resolved and trade eciently ex-post, we show that the buyer may be better off by proposing an early contract. This early contract uses the sellers' pri- vate information to divide types in a way that makes costly bypass a credible threat. While some types of seller accept the contract because they gain more than in the status quo situation, other types only accept for fear that rejection would reveal too much information. We derive the whole set of equilibrium payoffs of this game, and study extensions to fit various economic situations.
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- Jullien, Bruno & Pouyet, Jérôme & Sand-Zantman, Wilfried, 2013. "Divide and Learn: Early Contracting with Endogenous Threat," TSE Working Papers 13-415, Toulouse School of Economics (TSE).
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