Positive and Negative Selection in Bargaining

In the standard dynamic screening problem between an uninformed seller and a privately informed buyer, theory suggests that the presence (absence) of the buyer's outside option leads to a substantial surplus for the seller (buyer). This outcome arises from contrasting unraveling processes that theory predicts: negative selection occurs in the absence of an outside option, while positive selection occurs in the presence of it. We examine the validity of these contrasting unraveling processes and report laboratory data that qualitatively deviate from theoretical predictions. We found that the seller's profit ranking was reversed between the two environments. In particular, in the presence of an outside option, the buyer frequently rejected current-round offers, leading to pervasive delays; and the seller's reported beliefs about the buyer's type were qualitatively more consistent with the negative selection than with the theoretically predicted positive selection.