Fairness and the Coase conjecture

Jack Fanning

Journal of Economic Psychology, 2022, vol. 93, issue C

Abstract: If a buyer has a private value for a good and a seller can make repeated offers to her over an infinite time horizon, the Coase conjecture predicts the good is sold almost immediately at the buyer’s lowest valuation when players are patient (they discount future payoffs only slightly relative to payoffs today). Initial prices are lower when players are more patient. However, experimental studies of this setting find considerable inefficient delay, with much higher initial seller prices that increase with players’ patience. In this paper, I show how preferences for fairness help explain those findings. They make the seller’s payoff from agreement depend on the buyer’s value, creating an adverse selection problem. If the seller strongly dislikes selling to a high value buyer at a low price, the unique equilibrium features high initial prices which fall only slowly, if at all, to a price acceptable to a low value buyer; initial prices can increase with players’ patience.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:joepsy:v:93:y:2022:i:c:s0167487022000824

DOI: 10.1016/j.joep.2022.102571

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