BETTER LATER THAN NEVER? AN EXPERIMENT ON BARGAINING UNDER ADVERSE SELECTION

Abstract

AbstractA central result in the literature on bargaining with asymmetric information is that the uninformed party (buyer) can screen the informed party (seller) over time. Screening eliminates trade failures that are otherwise common in the presence of adverse selection, but the downside of the bargaining institution is the cost associated with repeated offers and time frictions. This article reports an experimental test of these predictions. We find that rates of trade are substantially higher in the bargaining institution than in control treatments in which we remove the possibility to make repeated offers (take‐it‐or‐leave‐it offer) or the time frictions. However, we also observe a persistent overdelay before agreements are reached, that is, bargaining takes longer than theoretically predicted. This lowers efficiency below its predicted level and below the level observed in the take‐it‐or‐leave‐it offer institution. We identify possible channels for overdelay in the form of fairness preferences and loss aversion, concluding that there are important behavioral deviations from the standard model that are detrimental to the efficiency of bargaining under incomplete information.