SFB 504 discussion paper 05-38

Tri Vi Dang

L 7, 3-5, D-68131 Mannheim

On Bargaining with Endogenous Information

Two risk neutral and ex ante identically informed agents bargain over the division of a fixed trading surplus with endogenous information and common values. The efficient outcome is trade without costly information acquisition irrespective of how the surplus is divided. This paper shows that if information acquisition is not observable, the set of efficient equilibria depends on information cost, a unique trading equilibrium may exist, and two types of inefficiencies can arise. If information cost is low, any trading equilibrium exhibits costly information acquisition. If information cost is in an intermediate range, no pure strategy equilibrium with agreement exists. However, if information acquisition is observable any efficient outcome satisfying individual rationality is attainable as an equilibrium.
C6 Hellwig
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