(In)efficiency in private value bargaining with naive players: Theory and experiment

Possajennikov, Alex; Saran, Rene

Abstract

The paper investigates two-player double-auction bargaining with private values in a setting with discrete two-point overlapping distributions of traders' valuations. We characterize parameter settings in which there exists a fully efficient equilibrium, and show that if there are traders that behave naively, i.e., set bid or ask equal to their valuation, then there is no equilibrium achieving full efficiency. We conduct an experiment to test the theoretical possibility that the presence of naive traders can reduce efficiency. We find, however, that efficiency is not lower in the presence of naive traders. Subjects mostly set bid/ask prices strategically but they do not coordinate on a fully efficient equilibrium and the extent of strategic behavior is not different in the presence of naive players. We show that a learning model of noisy strategy adjustment explains the observed behavior better than other (equilibrium or non-equilibrium) models.

Citation

Possajennikov, A., & Saran, R. (2023). (In)efficiency in private value bargaining with naive players: Theory and experiment. Journal of Economic Behavior and Organization, 216, 42-61. https://doi.org/10.1016/j.jebo.2023.10.003

• Journal Article Type: Article
• Acceptance Date: Oct 5, 2023
• Online Publication Date: Oct 16, 2023
• Publication Date: 2023-12
• Deposit Date: Oct 18, 2023
• Publicly Available Date: Oct 19, 2023
• Journal: Journal of Economic Behavior and Organization
• Print ISSN: 0167-2681
• Electronic ISSN: 2328-7616
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 216
• Pages: 42-61
• DOI: https://doi.org/10.1016/j.jebo.2023.10.003
• Keywords: Bargaining with private values; Double auction; Efficiency
• Public URL: https://nottingham-repository.worktribe.com/output/26222604
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S0167268123003578?via%3Dihub