The Role of Commitment in Bilateral Trade

Dino Gerardi, Johannes Hörner and Lucas Maestri

No 1760R, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper solves for the set of equilibrium payoffs in bargaining with interdependent values when the informed party makes all offers, as discounting vanishes. The seller of a good is informed of its quality, which affects both his cost and the buyer's valuation, but the buyer is not. To characterize this payoff set, we derive an upper bound, using mechanism design with limited commitment. We then prove that this upper bound is tight, by showing that all its extreme points are equilibrium payoffs. Our results shed light on the role of different forms of commitment on the bargaining process. In particular, we show that it is the buyer's inability to commit to a contract before observing the terms of trade that precludes efficiency.

Keywords: Bargaining; Mechanism design; Market for lemons (search for similar items in EconPapers)
JEL-codes: C70 C78 D82 (search for similar items in EconPapers)
Pages: 82 pages
Date: 2010-05, Revised 2013-10
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Published in Journal of Economic Theory (November 2014), 154: 578-603

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Related works:
Journal Article: The role of commitment in bilateral trade (2014)
Working Paper: The Role of Commitment in Bilateral Trade (2014)
Working Paper: The Role of Commitment in Bilateral Trade (2010)
Working Paper: The Role of Commitment in Bilateral Trade (2010)
Working Paper: The Role of Commitment in Bilateral Trade (2010)
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