Unveiling the Failure of Positive Selection

Dongkyu Chang, Duk Gyoo Kim and Wooyoung Lim
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Dongkyu Chang: City University of Hong Kong
Wooyoung Lim: Hong Kong University of Science and Technology

No 2025rwp-238, Working papers from Yonsei University, Yonsei Economics Research Institute

Abstract: In dynamic screening problems between an uninformed seller and a privately-informed buyer, theory suggests that the presence of the buyer’s outside option leads to a significant surplus for the seller. However, this prediction relies on multiple layers of positive selection reasoning. To examine whether participants demonstrate positive selection in their belief updates, we conduct a two-round bargaining experiment with finite price alternatives, which enable us to identify first-, second-, and third-order positive selection reasoning. Few subjects adhere to the equilibrium reasoning, and the majority fail even at the first-order reasoning. Consequently, the seller payoffs fall short of the theoretical benchmark.

Keywords: Positive Selection; Outside Options; Laboratory Experiments (search for similar items in EconPapers)
JEL-codes: C78 C91 D03 (search for similar items in EconPapers)
Pages: 38pages
Date: 2025-02
New Economics Papers: this item is included in nep-exp and nep-gth
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Persistent link: https://EconPapers.repec.org/RePEc:yon:wpaper:2025rwp-238

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