The Role of Commitment in Bilateral Trade
CFDP Revision Date
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.
Gerardi, Dino; Hörner, Johannes; and Maestri, Lucas, "The Role of Commitment in Bilateral Trade" (2010). Cowles Foundation Discussion Papers. 2091.