Costs of Implementation: Bargaining Costs versus Allocative Efficiency

32 Pages Posted: 1 Oct 2008

See all articles by Boris Maciejovsky

Boris Maciejovsky

University of Cambridge - MIT Institute

Birger Wernerfelt

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: September 29, 2008

Abstract

A mechanism with low direct cost of use may be preferred to alternatives implementing more efficient allocations. We show this experimentally by giving pairs of subjects the option to agree on a single average price for a sequence of trades - in effect pooling several small bargains into a larger one. We make pooling costly by tying it to some inefficient trades, but subjects nevertheless reveal strong tendencies to pool, particularly when more bargains remain to be struck and when bargaining is face to face. The results suggest that implementation costs could play a significant role in the use of many common trading practices, including the employment relationship.

Keywords: Bargaining Costs, Experiments, Theory of the Firm

JEL Classification: C90, D20, L22

Suggested Citation

Maciejovsky, Boris and Wernerfelt, Birger, Costs of Implementation: Bargaining Costs versus Allocative Efficiency (September 29, 2008). Available at SSRN: https://ssrn.com/abstract=1275622 or http://dx.doi.org/10.2139/ssrn.1275622

Boris Maciejovsky

University of Cambridge - MIT Institute ( email )

Cambridge
United Kingdom

Birger Wernerfelt (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-253-7192 (Phone)
617-258-7597 (Fax)

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