Transparent Dealing instead of Insider Haggling - Experimentally Analyzing an Institutional Choice for Repeated Trade

34 Pages Posted: 8 Nov 2021 Last revised: 21 Feb 2023

See all articles by Daniela Teresa di Cagno

Daniela Teresa di Cagno

LUISS Guido Carli

Lorenzo Ferrari

University of Rome Tor Vergata - Department of Economics and Finance

Werner Güth

Max Planck Institute for Research on Collective Goods; Luiss Guido Carli University

Vittorio Larocca

Luiss Guido Carli University

Date Written: November 5, 2021

Abstract

In repeated commercial and organizational interactions, it is not unusual to observe privately informed parties enter long-term transparent deals with their counterparts rather than bargaining in each interaction period while retaining private information. To analyze such institutional choice, we set up an experiment where, in each of two rounds, buyers and sellers are constantly paired for six periods to trade a commodity whose value is privately known to the seller. In each period both parties are aware that there are gains from trade and of how their evaluations are proportionally linked and randomly generated. When choosing transparent dealing, the seller informs the buyer about which surplus share (s)he demands in all periods and, as a consequence, the commodity’s actual value in each period. When choosing the default institution, which we denote as insider haggling, the privately informed seller states a price and declares a cheap-talk commodity value in each period. Our results show that sellers opt far more often for transparent dealing, especially when female, although this is on average less profitable. Moreover, we find that the institutional choice is addictive for participants who are sellers in both rounds. Finally, transparent dealing is fairer and significantly enhances trade.

Keywords: Bargaining, Experiment, Complete and Incomplete Information

JEL Classification: C73, C92, D82, D90

Suggested Citation

di Cagno, Daniela Teresa and Ferrari, Lorenzo and Güth, Werner and Larocca, Vittorio, Transparent Dealing instead of Insider Haggling - Experimentally Analyzing an Institutional Choice for Repeated Trade (November 5, 2021). CEIS Working Paper No. 523, Available at SSRN: https://ssrn.com/abstract=3957186 or http://dx.doi.org/10.2139/ssrn.3957186

Daniela Teresa Di Cagno

LUISS Guido Carli ( email )

Via O. Tommasini 1
Rome, Roma 00100
Italy

Lorenzo Ferrari

University of Rome Tor Vergata - Department of Economics and Finance ( email )

Rome
Italy

Werner Güth

Max Planck Institute for Research on Collective Goods

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

Luiss Guido Carli University ( email )

Via O. Tommasini 1
Rome, Roma 00100
Italy

Vittorio Larocca (Contact Author)

Luiss Guido Carli University ( email )

Rome
Italy

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