Business Intelligence

The Role Of Commitment In Bilateral Trade

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Executive Summary

The authors 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. They 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. They 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 them to identify how different levels of commitment affect outcomes, and which constraints, if any, preclude efficiency.

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