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The Role of Commitment in Bilateral Trade

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Abstract

This 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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  • Dino Gerardi & Johannes Horner & Lucas Maestri, 2010. "The Role of Commitment in Bilateral Trade," Cowles Foundation Discussion Papers 1760R, Cowles Foundation for Research in Economics, Yale University, revised Oct 2013.
    • Handle: RePEc:cwl:cwldpp:1760r
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    Cited by:

    1. Sher, Itai & Vohra, Rakesh, 2015. "Price discrimination through communication," Theoretical Economics, Econometric Society, vol. 10(2), May.
    2. Camargo, Braz & Lester, Benjamin, 2014. "Trading dynamics in decentralized markets with adverse selection," Journal of Economic Theory, Elsevier, vol. 153(C), pages 534-568.
    3. Tsoy, Anton, 2018. "Alternating-offer bargaining with the global games information structure," Theoretical Economics, Econometric Society, vol. 13(2), May.
    4. Robert Shimer & Ivan Werning, 2019. "Efficiency and information transmission in bilateral trading," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 154-176, July.
    5. Jean Tirole, 2016. "From Bottom of the Barrel to Cream of the Crop: Sequential Screening With Positive Selection," Econometrica, Econometric Society, vol. 84, pages 1291-1343, July.
    6. Marilyn Pease & Kyungmin Kim, 2014. "Costly Search with Adverse Selection: Solicitation Curse vs. Accelerating Blessing," 2014 Meeting Papers 816, Society for Economic Dynamics.
    7. Francesco Giovannoni & Toomas Hinnosaar, 2022. "Pricing Novel Goods," Papers 2208.04985, arXiv.org, revised Aug 2024.
    8. Dino Gerardi & Lucas Maestri & Ignacio Monzón, 2022. "Bargaining over a Divisible Good in the Market for Lemons," American Economic Review, American Economic Association, vol. 112(5), pages 1591-1620, May.
    9. Ayça Kaya & Kyungmin Kim, 2018. "Trading Dynamics with Private Buyer Signals in the Market for Lemons," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(4), pages 2318-2352.
    10. Barsanetti, Bruno & Camargo, Braz, 2022. "Signaling in dynamic markets with adverse selection," Journal of Economic Theory, Elsevier, vol. 206(C).

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    More about this item

    Keywords

    Bargaining; Mechanism design; Market for lemons;
    All these keywords.

    JEL classification:

    • 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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