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Divide and Learn: Early Contracting with Endogenous Threat

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  • Jullien, Bruno
  • Pouyet, Jérôme
  • Sand-Zantman, Wilfried

Abstract

An 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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Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 13-415.

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Date of creation: May 2013
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Handle: RePEc:tse:wpaper:27396

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  1. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
  2. Rasul, Imran & Sonderegger, Silvia, 2010. "The role of the agent's outside options in principal-agent relationships," Games and Economic Behavior, Elsevier, vol. 68(2), pages 781-788, March.
  3. Peter Cramton & Thomas R. Palfrey, 1995. "Ratifiable Mechanisms: Learning from Disagreement," Papers of Peter Cramton 95geb, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998.
  4. Sobel, Joel, 1993. "Information Control in the Principal-Agent Problem," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 259-69, May.
  5. Anke Kessler, 1998. "The Value of Ignorance," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 339-354, Summer.
  6. Grossman, Sanford J. & Perry, Motty, 1986. "Perfect sequential equilibrium," Journal of Economic Theory, Elsevier, vol. 39(1), pages 97-119, June.
  7. Celik, Gorkem & Peters, Michael, 2008. "Equilibrium Rejection of a Mechanism," Microeconomics.ca working papers gorkem_celik-2008-10, Vancouver School of Economics, revised 06 Aug 2008.
  8. Alessandro Pavan, 2004. "On the Optimality of Privacy in Sequential Contracting," Theory workshop papers 658612000000000067, UCLA Department of Economics.
  9. Bruno Jullien, 2011. "Competition in Multi-sided Markets: Divide and Conquer," American Economic Journal: Microeconomics, American Economic Association, vol. 3(4), pages 186-220, November.
  10. Ilya Segal, 1999. "Contracting With Externalities," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 337-388, May.
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