Reputational Bargaining and Inefficient Technology Adoption

Abstract

A seller decides whether to adopt a new technology that can lower his cost of production and then bargains with a buyer over the price of an object. Both players can build reputations for being obstinate in the bargaining process by offering the same price over time. We show that even when the buyer cannot observe the seller's adoption decision, players' incentives to build reputations can lead to inefficient under-adoption. We also show that under-adoption occurs in equilibrium if and only if there are significant delays in reaching agreements, and that these inefficiencies can arise if and only if the social benet from adoption is large enough. As a result, an increase in the social benefit from adoption may lower the probability of adoption.