Moral motivations in sequential buyer-seller interactions with adverse selection

I study a bilateral trade setting with asymmetric information, where one side has all the bargaining power and makes a take-it-or-leave-it price offer. Both agents hold a certain degree of Kantian morality and thus care about what would have happened had their actions been adopted by their counterpart. In order to capture this, I implement a Veil-of-Ignorance approach, whereby players are uncertain about their role and are thus forced to submit strategies for both the case where they are the Buyer and the Seller. More precisely, in the first stage, both agents propose the price at which they would be willing to buy, while in a second stage they decide whether they would accept to sell at the offered price. Buyer and Seller roles are randomly assigned in the last stage. I consider adverse selection by assuming that the Seller is fully informed about the product’s quality, while the Buyer can only form an expectation about it. I show that when the degree of morality is low, the expected quality necessary to produce efficient equilibria is lower than that required by purely selfish agents and, moreover, it is decreasing in the intensity of the moral concern. I also find a threshold degree of morality above which only efficient equilibria are possible for any expectation about quality. Moral preferences thus mitigate the adverse selection problem and completely eliminate it when sufficiently strong.