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Dino Gerardi

13 May 2013 @ 12:45

 

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Date:
13 May 2013
Time:
12:45
Event Category:

“A Theory of Slow Trading in Bargaining”

Abstract

A seller dynamically sells a divisible good to a buyer. It is common knowledge that there are gains from trade and that the gains per-unit are decreasing. Payoffs are interdependent as in Akerlof’’s market for lemons. The seller is informed about the good’s quality. The buyer learns about it only through the seller’s behavior. We characterize the stationary equilibrium when the time between offers is small. The buyer starts the game making an offer for the whole good at a price that only sellers with low valuation could accept. If this offer is rejected, the parties reach an
impasse and there is delay in trading. After this delay, the buyer makes an offer for a fraction of the good at a price that all sellers accept. Following this acceptance, the buyer makes an offer for the remaining of the good at a price that only sellers with low valuation could accept. If this offer is rejected, a new impasse is reached. We use this characterization to analyze the limit equilibrium as the good becomes more divisible. We prove that there is slow trading: Buyers with high valuation sell the good smoothly over time. Buyers with low valuation are indifferent between selling the remaining part of the good in the current period or mimicking high-valuation buyers for some time and selling the remaining of the good later.