Common Knowledge as a Barrier to Negotiation

UCLA Law Review, 1997

Posted: 2 May 1998

See all articles by Ian Ayres

Ian Ayres

Yale University - Yale Law School; Yale University - Yale School of Management

Barry J. Nalebuff

Yale University - Yale School of Management; Yale University - Cowles Foundation

Multiple version iconThere are 2 versions of this paper

Date Written: May 4, 1997

Abstract

When we disclose information, we may also communicate information about information. The listener learns not only X but also that the speaker knows X. And the speaker also learns by speaking (for example, the speaker knows that the listener knows X). In this paper we present a series of examples where negotiators want to communciate X, but do not want to comunicate higher-order information about X.

While it may be efficient for one negotiator to tell another the true consequences of failing to reach agreement, when such information is threatening or insulting it may be useful to prevent the threat or insult from becoming common knowledge. Game-theorists often model private information as the but-for cause of inefficient distributive bargaining. In these simple bargaining models, if each side's BATNA were common knowledge, the parties would instantaneously (and costlessly) reach agreement. But we show that while the lack of first-order information can impede trade, the presence of higher-order information (information about information) might be a barrier to negotiation, a transaction cost that might be avoided by ambiguous or indirect communication or by caucus mediation.

JEL Classification: D81, D82

Suggested Citation

Ayres, Ian and Nalebuff, Barry, Common Knowledge as a Barrier to Negotiation (May 4, 1997). UCLA Law Review, 1997. Available at SSRN: https://ssrn.com/abstract=82868

Ian Ayres (Contact Author)

Yale University - Yale Law School ( email )

P.O. Box 208215
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203-432-7101 (Phone)
203-432-2592 (Fax)

Yale University - Yale School of Management

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Barry Nalebuff

Yale University - Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-5968 (Phone)
203-432-6974 (Fax)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-5968 (Phone)

HOME PAGE: http://barrynalebuff.com

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