Hidir, Sinem (2014) Strategic Inaccuracy in Bargaining. TSE Working Paper, n. 14-541

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Abstract

This paper studies a buyer-seller game with pre-trade communication of private horizontal taste from the buyer followed by a take it or leave it offer by the seller. The amount of information transmitted improves the gains from trade, but also determines how this surplus will be shared between the two. Lack of commitment to a price creates a hold-up problem and a trade off between efficiency and rent extraction. In this setting, coarse information arises due to the concerns on the terms of the transaction. As the preferences get less important, information transmission becomes less precise. It is shown that in the buyer optimal equilibria of the static and dynamic games, the messages sent are just informative enough to ensure trade. In the dynamic game, the buyer is always better off sending infor- mative messages only at the first period, implying no gains from gradual revelation of information.