Enhancing Honesty in Bargaining Under Incomplete Information: An Experimental Study of the Bonus Procedure
Group Decision and Negotiation, Vol. 13, pp. 539-562, 2004
24 Pages Posted: 15 Oct 2004 Last revised: 22 Jul 2008
The sealed-bid k-double auction mechanism for two-person bargaining under incomplete information can be extended by providing a bonus for both traders if, and only if, an agreement is reached. Brams and Kilgour (1996) proved that there is a unique level of bonus, namely, half the difference between the buyer's bid and seller's ask, that induces the traders to bargain truthfully. Stein and Parco (2001) extend the theoretical work to the case of partial bonus levels that reduce, but do not completely eliminate, misrepresentation of the reservation values. In the present study, we experimentally investigate the effects of providing different bonus values on the misrepresentation of the bargainers' reservation values. Our results show that implementation of a bonus has a significant impact on bargaining behavior but not nearly to the extent predicted by the equilibrium analysis. A reinforcement-based learning model originally proposed for the no bonus case accounts quite well for the results of all three experimental conditions.
Keywords: Sealed-bid, k-double auction, bonus procedure, truthful revelation, experiment
JEL Classification: C72, C78, D81
Suggested Citation: Suggested Citation