The Role of Commitment in Bilateral Trade

Abstract

This paper characterizes 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 in bargaining. In particular, they imply that the buyer’s inability to commit before observing the terms of trade is what precludes efficiency.

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Reference

Dino Gerardi, Johannes Hörner, and Lucas Maestri, “The Role of Commitment in Bilateral Trade”, Journal of Economic Theory, vol. 154, 2014, pp. 578–603.