Learning Before Trading: On the Inefficiency of Ignoring Free Information

This paper analyzes a bilateral trade model where the buyer's valuation for the object is uncertain and she can privately purchase any signal about her valuation. The seller makes a take-it-or-leave-it offer to the buyer. The cost of a signal is smooth and increasing in informativeness. We characterize the set of equilibria when learning is free and show that they are strongly Pareto ranked. Our main result is that, when learning is costly but the cost of information goes to zero, equilibria converge to the worst free-learning equilibrium.

Keywords: flexible learning, bilateral trade, information acquisition

JEL Classification: C70, D42, D43, D47

Suggested Citation: Suggested Citation

Ravid, Doron and Roesler, Anne-Katrin and Szentes, Balazs, Learning Before Trading: On the Inefficiency of Ignoring Free Information (November 6, 2020). Available at SSRN: https://ssrn.com/abstract=3317917 or http://dx.doi.org/10.2139/ssrn.3317917