Bargaining procedures that induce honesty

When bargaining between two actors over an object is modeled as a noncooperative game of incomplete information, equilibrium bids generally involve misrepresentation of the players' true values. But the bargainers' payoffs can be modified so that truthfully revealing one's reservation price is a dominant strategy. While such modifications define bargaining procedures that induce honesty in bidding and thereby avoid an inefficient outcome, these procedures may be vulnerable to other difficulties. The procedures analyzed are the following: Bonus Procedure: the players share a bonus equal to the overlap in their bids, whenever a settlement is feasible; Penalty Procedure: the settlement is reduced (usually probabilistically) to a level proportionate to the overlap of the bids, whenever a settlement is feasible; Appraisal Procedure: there is a settlement when, and only when, an independent appraisal is above the seller's and below the buyer's bid. The appraisal value is then the exchange price; Expansive Appraisal Procedure: there is a settlement at the appraised value, unless it is unfavorable to both the buyer and the seller. These honesty-inducing procedures are evaluated according to several criteria, namely, efficiency in achieving feasible trades, ability to be self-financing (rather than requiring a subsidy), vulnerability to collusion, and compatibility with each player's individual interests. Besides these theoretical assessments, practical considerations, including the need for a settlement, the means of implementation, and so on, are discussed.