TY - JOUR
T1 - BETTER LATER THAN NEVER? AN EXPERIMENT ON BARGAINING UNDER ADVERSE SELECTION
AU - Bochet, Olivier
AU - Siegenthaler, Simon
N1 - Funding Information:
1We are indebted to Nikos Nikiforakis for his helpful comments and suggestions on an earlier draft of this article. We also thank Pedro Dal Bó, Jacob Goeree, the Editor, two anonymous referees and seminar participants at ESA Tokyo 2013, NYU Abu Dhabi, the University of Zürich, the University of Bern, and the WESSI school in experimental economics. This article is partially funded by the SNF under grant 100018-143757. Please address correspondence to: Olivier Bochet, Division of Social Science, New York University Abu Dhabi, U.A.E. E-mail: [email protected].
Publisher Copyright:
© (2018) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association
PY - 2018/5
Y1 - 2018/5
N2 - A central result in the literature on bargaining with asymmetric information is that the uninformed party (buyer) can screen the informed party (seller) over time. Screening eliminates trade failures that are otherwise common in the presence of adverse selection, but the downside of the bargaining institution is the cost associated with repeated offers and time frictions. This article reports an experimental test of these predictions. We find that rates of trade are substantially higher in the bargaining institution than in control treatments in which we remove the possibility to make repeated offers (take-it-or-leave-it offer) or the time frictions. However, we also observe a persistent overdelay before agreements are reached, that is, bargaining takes longer than theoretically predicted. This lowers efficiency below its predicted level and below the level observed in the take-it-or-leave-it offer institution. We identify possible channels for overdelay in the form of fairness preferences and loss aversion, concluding that there are important behavioral deviations from the standard model that are detrimental to the efficiency of bargaining under incomplete information.
AB - A central result in the literature on bargaining with asymmetric information is that the uninformed party (buyer) can screen the informed party (seller) over time. Screening eliminates trade failures that are otherwise common in the presence of adverse selection, but the downside of the bargaining institution is the cost associated with repeated offers and time frictions. This article reports an experimental test of these predictions. We find that rates of trade are substantially higher in the bargaining institution than in control treatments in which we remove the possibility to make repeated offers (take-it-or-leave-it offer) or the time frictions. However, we also observe a persistent overdelay before agreements are reached, that is, bargaining takes longer than theoretically predicted. This lowers efficiency below its predicted level and below the level observed in the take-it-or-leave-it offer institution. We identify possible channels for overdelay in the form of fairness preferences and loss aversion, concluding that there are important behavioral deviations from the standard model that are detrimental to the efficiency of bargaining under incomplete information.
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U2 - 10.1111/iere.12292
DO - 10.1111/iere.12292
M3 - Article
AN - SCOPUS:85048072116
SN - 0020-6598
VL - 59
SP - 947
EP - 971
JO - International Economic Review
JF - International Economic Review
IS - 2
ER -