An Offer You Can't Refuse: Early Contracting with Endogenous Threat
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.
|Date of creation:||May 2013|
|Date of revision:||Jun 2014|
|Publication status:||Published in The RAND Journal of Economics, 2017.|
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