To reveal or not to reveal? Strategic disclosure of private information in negotiation

Abstract

Within the bargaining literature, it is widely held that negotiators should never reveal information that will lead to disclosure of their reservation prices. We analyze a simple bargaining and search model in which the informed buyer can choose to reveal his cost of searching for an outside price (which determines his reservation price) to the uninformed seller. We demonstrate that buyers can be made better off by revealing their search cost. More interestingly, we also find that, depending on the assumed distribution of search costs, sometimes buyers with relatively low search costs should reveal their private information whereas in other cases buyers with relatively high search costs should do so. We then test our model experimentally and find that subjects’ behavior is not entirely consistent with theoretical predictions. In general, bargainers’ behavior is better explained by a bounded rationality model similar to “fictitious play”.