Bargaining with Rational Inattention

Abstract

I study a one-sided oers bargaining game in which a fully rational seller is making repeated oers to a rationally inattentive buyer (Sims, 1998). The quality of the good is random and is known to the seller. The buyer needs to pay attention to both the quality of the good and the seller’s oers. I show that the buyer attains half of the uncertain portion of the surplus as attention costs become negligible and oers are frequent. With infrequent oers and positive attention costs an equilibrium exists both in the finite and the infinite horizon games. This equilibrium involves the buyer paying more for, but also obtaining a higher surplus from, higher quality goods. Trade occurs with delay that is decreasing with the quality of the good and persists even when oers are frequent. Finally, I show that revealing the quality of the good to the buyer reduces both the buyer’s surplus and overall eciency.