(In)efficiency in private value bargaining with naive players: Theory and experiment

Alex Possajennikov () and Rene Saran

Journal of Economic Behavior & Organization, 2023, vol. 216, issue C, 42-61

Abstract: The paper investigates two-player double-auction bargaining with private values in a setting with discrete two-point overlapping distributions of traders' valuations. We characterize parameter settings in which there exists a fully efficient equilibrium, and show that if there are traders that behave naively, i.e., set bid or ask equal to their valuation, then there is no equilibrium achieving full efficiency. We conduct an experiment to test the theoretical possibility that the presence of naive traders can reduce efficiency. We find, however, that efficiency is not lower in the presence of naive traders. Subjects mostly set bid/ask prices strategically but they do not coordinate on a fully efficient equilibrium and the extent of strategic behavior is not different in the presence of naive players. We show that a learning model of noisy strategy adjustment explains the observed behavior better than other (equilibrium or non-equilibrium) models.

Keywords: Bargaining with private values; Double auction; Efficiency (search for similar items in EconPapers)
JEL-codes: C72 C78 C91 D82 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:216:y:2023:i:c:p:42-61

DOI: 10.1016/j.jebo.2023.10.003

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