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An Offer You Can't Refuse: Early Contracting with Endogenous Threat

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

We analyze early contracting when a seller has private information on the future gains from trade and the buyer can bypass. Despite ex-post trade occurring under complete information and being efficient, early negotiation with an informed seller allows the uninformed buyer to improve her bargaining position. We show that the buyer can divide seller's types so that bypass becomes a credible threat. While some sellers accept because they gain more than by trading ex-post, others accept only because they fear that rejection would reveal too much information. Equilibrium payoffs are characterized and are shown to have a close connection with ratifiable equilibrium payoffs.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 783.

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Date of creation: May 2013
Date of revision: Jun 2014
Handle: RePEc:ide:wpaper:27395
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  1. Celik, Gorkem & Peters, Michael, 2008. "Equilibrium Rejection of a Mechanism," working papers gorkem_celik-2008-10, Vancouver School of Economics, revised 06 Aug 2008.
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