The Role of Commitment in Bilateral Trade
We examine the buyer-seller problem under diﬀerent levels of commitment. The seller is informed of the quality of the good, which aﬀects both his cost and the buyer’s valuation, but the buyer is not. We characterize the allocations that can be achieved through mechanisms in which, unlike with full commitment, the buyer has the option to “walk away” after observing a given oﬀer. We further characterize the equilibrium payoﬀs that can be achieved in the bargaining game in which the seller makes all the oﬀers, as the discount factor goes to one. This allows us to identify how diﬀerent levels of commitment aﬀect outcomes, and which constraints, if any, preclude eﬀiciency.
Gerardi, Dino; Hörner, Johannes; and Maestri, Lucas, "The Role of Commitment in Bilateral Trade" (2010). Cowles Foundation Discussion Papers. 2090.