The Role of Commitment in Bilateral Trade

77 Pages Posted: 14 May 2010

See all articles by Dino Gerardi

Dino Gerardi

Yale University - Cowles Foundation

Johannes Horner

Yale University - Cowles Foundation

Lucas Maestri

University of Toulouse 1 - Toulouse School of Economics (TSE)

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Date Written: May 11, 2010

Abstract

We examine the buyer-seller problem under different levels of commitment. The seller is informed of the quality of the good, which affects both his cost and the buyer’s valuation, but the buyer is not. We characterize the allocations that can be achieved through mechanisms in which, unlike with full commitment, the buyer has the option to "walk away" after observing a given offer. We further characterize the equilibrium payoffs that can be achieved in the bargaining game in which the seller makes all the offers, as the discount factor goes to one. This allows us to identify how different levels of commitment affect outcomes, and which constraints, if any, preclude efficiency.

Keywords: Bargaining, Mechanism Design, Market for Lemons

JEL Classification: C70, C78, D82

Suggested Citation

Gerardi, Dino and Horner, Johannes and Maestri, Lucas, The Role of Commitment in Bilateral Trade (May 11, 2010). Cowles Foundation Discussion Paper No. 1760, Available at SSRN: https://ssrn.com/abstract=1604546 or http://dx.doi.org/10.2139/ssrn.1604546

Dino Gerardi (Contact Author)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-3562 (Phone)
203-432-5779 (Fax)

Johannes Horner

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Lucas Maestri

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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