The Efficiency of Negotiations with Uncertainty and Multi-Dimensional Deals

Abstract

We study negotiations over multiple goods or dimensions that can be bundled together. We concentrate on settings in which the maximum potential surplus that can be reached is commonly known, but the bundle of goods or decisions that realizes that surplus is unknown and involves two-sided incomplete information. We use theory and controlled laboratory experiments to show that in such settings efficient trade is possible despite substantial asymmetric information. Moreover, we show that achieving efficient outcomes depends on having sufficiently rich negotiation protocols: if agents can offer to trade bundles of goods for overall bundle prices, then all equilibria are efficient. By contrast, if agents negotiate over every good separately, each with its own price, then all equilibria are inefficient.

Keywords: Negotiation, Bargaining, Exchange, Trade, Multiple Items, Linking, Efficiency, Experiment

JEL Classification: A13, C72, C78, D47, D82, C92