The Role of Commitment in Bilateral Trade

83 Pages Posted: 6 Oct 2013

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)

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2013

Abstract

This paper solves for 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 on the bargaining process. In particular, we show that it is the buyer's inability to commit to a contract before observing the terms of trade that precludes 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 (October 1, 2013). Cowles Foundation Discussion Paper No. 1760R, Available at SSRN: https://ssrn.com/abstract=2334345 or http://dx.doi.org/10.2139/ssrn.2334345

Dino Gerardi

Yale University - Cowles Foundation ( email )

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

Johannes Horner (Contact Author)

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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