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When to Learn What in Bilateral Trade

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  • Eliaz, Kfir
  • Frug, Alexander

Abstract

We propose and analyze a model of bilateral trade in which private information about the quality of an asset can be acquired only gradually over time. An asset is characterized by a vector of binary i.i.d. attributes. The value of this asset to the seller and buyer is a weighted sum of the attributes, where the buyer's weights differ from the seller's. Initially, the seller is uninformed about the quality of the asset. In each period he decides whether to make a price offer (based on his current information) or to inspect the asset (postponing the sales offer). In the latter case, he chooses an attribute and (costlessly) learns its realization. The buyer does not observe the realized attributes before purchasing the good, however, he may or may not observe which inspections were performed by the seller (we consider both cases). We study the seller's strategic scheduling of inspections in this environment and its effect on the realized gains from trade in equilibrium. We identify the necessary and sufficient conditions under which the players can realize some gains from trade, and all gains from trade.

Suggested Citation

  • Eliaz, Kfir & Frug, Alexander, 2016. "When to Learn What in Bilateral Trade," CEPR Discussion Papers 11350, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:11350
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    References listed on IDEAS

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    1. Levin, Jonathan, 2001. "Information and the Market for Lemons," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 657-666, Winter.
    2. Frug, Alexander, 2018. "Strategic gradual learning and information transmission," Journal of Economic Theory, Elsevier, vol. 177(C), pages 594-615.
    3. Curtis R. Taylor, 1999. "Time-on-the-Market as a Sign of Quality," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(3), pages 555-578.
    4. Ilan Guttman & Ilan Kremer & Andrzej Skrzypacz, 2014. "Not Only What but Also When: A Theory of Dynamic Voluntary Disclosure," American Economic Review, American Economic Association, vol. 104(8), pages 2400-2420, August.
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    Cited by:

    1. Frug, Alexander, 2018. "Strategic gradual learning and information transmission," Journal of Economic Theory, Elsevier, vol. 177(C), pages 594-615.

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    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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