Working Paper: CEPR ID: DP6554
Authors: Juan D. Carrillo; Thomas R. Palfrey
Abstract: We investigate, in a simple bilateral bargaining environment, the extent to which asymmetric information can induce individuals to engage in exchange where trade is not mutually profitable. We first establish a no-trade theorem for this environment. A laboratory experiment is conducted, where trade is found to occur between 16% and 32% of the time, depending on the specific details of the environment and trading mechanism. In most cases, buyers gain from such exchange, at the expense of sellers. An equilibrium model with naive, or 'cursed' beliefs accounts for some of the behaviour findings, but open questions remain.
Keywords: bilateral bargaining; experimental economics; no-trade theorem; private information
JEL Codes: D82; O24; O26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| private information held by buyers (D14) | acceptance of trade offers (F19) |
| buyers exploit sellers (D43) | adverse selection due to information asymmetry (D82) |
| sellers incur losses (D44) | buyers gain (D16) |
| choice of trading mechanism (D47) | observed trading outcomes (G14) |
| seller's price mechanism (D41) | frequency of trades (G12) |
| initial conditions and information structure (D89) | trading behavior (G41) |