SFB 303 Discussion Paper No. A - 563

Author: Kessler, Anke and Lülfesmann, Christoph
Title: Bilatral Bargaining under Non-Verifiable Information
Abstract: The paper considers an alternating offers between a buyer and a seller who face several trading opportunities (goods). The goods differ in their characteristics (quality) which are observable but non-verifiable. We completely characterize the set of subgame-perfect equilibria for the special case of two goods. Qualitatively different types of equilibrium outcomes occur depending on the parameters of the model: (a) the unique subgame-perfect equilibrium may entail inefficient trade, (b) the efficiency of the outcome may depend on who moves first in the bargaining process, and (c) multiple equilibria may exist including equilibria with delay in negotiations. As an extension, we allow the parties to renegotiate which is is shown to reestablish uniqueness and efficiency of equilibrium if the parties are suffiently patient. There exists a monotonic relationship between the players' patience and efficiency in this case. Finally, we derive a sufficient condition for a unique and efficient equilibrium to exist for the case of a continuum of trading opportunities.
Keywords: Bilateral Bargaining, Non-Verifiable Information, Quality Choice
JEL-Classification-Number: C78, L14, L15, D82
Creation-Date: Revised Version: June 1998
URL: ../1998/a/bonnsfa563.pdf"

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