Bargaining with Hard Evidence

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Abstract

This paper studies how the presence of concealable hard evidence affects the timing of agreement and the size and distribution of surplus in bargaining. A buyer and a seller receive randomly-arriving, verifiable, but concealable evidence about the value of a tradable good. Each party discloses individually favourable information but conceals signals that benefit the other side, giving rise to mutual suspicion; the seller repeatedly posts prices valid for one period. In the leading case of interest with a finite horizon and sufficiently patient players, the equilibrium is characterized by an interval of skimming (a sequence of prices acceptable only to a buyer who has learnt that the good’s value is high) concluded by a single settlement period in which agreement is reached for sure. The length of delay until agreement and the corresponding efficiency loss are decreasing in the time horizon and in the abilities of the trading parties to identify the good’s value, but increasing in impa- tience. An arbitrarily long time horizon leads to immediate agreement if the parties are even slightly impatient and interaction is frequent enough; if the parties are per- fectly patient there is no trade without evidence disclosure.

Bibliographical metadata

Original languageEnglish
Pages (from-to)2039-2063
JournalThe Economic Journal
Volume129
Issue number621
Early online date8 Jan 2019
DOIs
Publication statusPublished - Jul 2019

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