Deadline Credibility and Trade Efficiency

Abstract

Many real-world negotiations are chronically delayed until deadlines, but hard dead- lines are costly in generating separations. Must all deadlines in one-on-one market trades be perfectly credible? To refine the institutional role of deadlines, I propose a mechanism of an imperfectly credible soft deadline to facilitate the agreement. Employing a canoni- cal seller–buyer dynamic bargaining model with a hard deadline, I analytically derive an optimal deadline credibility that the soft deadline elicits agreements without triggering sep- arations and, consequently, maximizes the trade efficiency. Under a reasonably soft risk of breakdown, the seller is tempted to discount a price to secure a profit and the buyer is more likely to compromise right before the soft deadline, as the pricing resembles an ultimatum. The results of a laboratory experiment qualitatively support the mechanism’s efficacy with even larger magnitudes.

Keywords: bargaining, one-sided incomplete information, deadline effect, durable goods monopoly, market efficiency, laboratory experiment