Transparent Dealing instead of Insider Haggling - Experimentally Analyzing an Institutional Choice for Repeated Trade

Abstract

In repeated commercial and organizational interactions, it is not unusual to observe privately informed parties enter long-term transparent deals with their counterparts rather than bargaining in each interaction period while retaining private information. To analyze such institutional choice, we set up an experiment where, in each of two rounds, buyers and sellers are constantly paired for six periods to trade a commodity whose value is privately known to the seller. In each period both parties are aware that there are gains from trade and of how their evaluations are proportionally linked and randomly generated. When choosing transparent dealing, the seller informs the buyer about which surplus share (s)he demands in all periods and, as a consequence, the commodity’s actual value in each period. When choosing the default institution, which we denote as insider haggling, the privately informed seller states a price and declares a cheap-talk commodity value in each period. Our results show that sellers opt far more often for transparent dealing, especially when female, although this is on average less profitable. Moreover, we find that the institutional choice is addictive for participants who are sellers in both rounds. Finally, transparent dealing is fairer and significantly enhances trade.

Keywords: Bargaining, Experiment, Complete and Incomplete Information

JEL Classification: C73, C92, D82, D90