The Efficiency of Real-World Bargaining: Evidence from Wholesale Used-Auto Auctions

The Review of Economic Studies ◽

10.1093/restud/rdaa007 ◽

2020 ◽

Cited By ~ 9

Author(s):

Bradley J Larsen

Keyword(s):

Incomplete Information ◽

Real World ◽

Bilateral Trade ◽

Efficient Frontier ◽

Gains From Trade ◽

Efficiency Loss ◽

Car Industry ◽

Ex Post ◽

Ex Ante ◽

Used Car

Abstract This study empirically quantifies the efficiency of a real-world bargaining game with two-sided incomplete information. Myerson and Satterthwaite (1983) and Williams (1987) derived the theoretical ex-ante efficient frontier for bilateral trade under two-sided uncertainty and demonstrated that it falls short of ex-post efficiency, but little is known about how well bargaining performs in practice. Using about 265,000 sequences of a game of alternating-offer bargaining following an ascending auction in the wholesale used-car industry, this study estimates (or bounds) distributions of buyer and seller values and evaluates where realized bargaining outcomes lie relative to efficient outcomes. Results demonstrate that the ex-ante and ex-post efficient outcomes are close to one another, but that the real bargaining falls short of both, suggesting that the bargaining is indeed inefficient but that this inefficiency is not solely due to the information constraints highlighted in Myerson and Satterthwaite (1983). Quantitatively, findings indicate that over one-half of failed negotiations are cases where gains from trade exist, leading an efficiency loss of 12–23% of the available gains from trade.

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Designing Random Allocation Mechanisms: Theory and Applications

The American Economic Review ◽

10.1257/aer.103.2.585 ◽

2013 ◽

Vol 103 (2) ◽

pp. 585-623 ◽

Cited By ~ 119

Author(s):

Eric Budish ◽

Yeon-Koo Che ◽

Fuhito Kojima ◽

Paul Milgrom

Keyword(s):

Resource Allocation ◽

School Choice ◽

Real World ◽

Random Allocation ◽

Assignment Problems ◽

Matching Problems ◽

House Allocation ◽

Controlled Choice ◽

Ex Post ◽

Ex Ante

Randomization is commonplace in everyday resource allocation. We generalize the theory of randomized assignment to accommodate multi-unit allocations and various real-world constraints, such as group-specific quotas (“controlled choice”) in school choice and house allocation, and scheduling and curriculum constraints in course allocation. We develop new mechanisms that are ex ante efficient and fair in these environments, and that incorporate certain non-additive substitutable preferences. We also develop a “utility guarantee” technique that limits ex post unfairness in random allocations, supplementing the ex ante fairness promoted by randomization. This can be applied to multi-unit assignment problems and certain two-sided matching problems. (JEL C78, D82)

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Legal Environment and Contractual Choice

The B E Journal of Theoretical Economics ◽

10.1515/bejte-2020-0098 ◽

2021 ◽

Vol 0 (0) ◽

Author(s):

Ho Cheung Cheng

Keyword(s):

Optimal Contract ◽

Legal Environment ◽

Gains From Trade ◽

Legal Systems ◽

Ex Post ◽

Ex Ante ◽

Contractual Choice

Abstract This paper considers contractual choice under imperfect legal systems, in particular, contracts with different timing of payment. Ex-ante payment contracts are risky for the buyer, because the seller may shirk. Ex-post payment contracts are risky for the seller, as the buyer may default. Optimal contract is solved for any given legal environment. Exchanges with lower gains from trade tend to adopt ex-post payment contracts. The seller is a better proposer than the buyer in terms of the efficiency of the proposed contract. Surprisingly, offering ex-ante payment contracts is not strictly better for the seller under any legal environment. Moreover, mixed payment contracts are also analyzed and shown to never be optimal.

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Performance‐maximizing large contests

Theoretical Economics ◽

10.3982/te3588 ◽

2020 ◽

Vol 15 (1) ◽

pp. 57-88 ◽

Cited By ~ 2

Author(s):

Wojciech Olszewski ◽

Ron Siegel

Keyword(s):

Incomplete Information ◽

Real World ◽

Complete Characterization ◽

Typical Case ◽

Ex Ante ◽

Contest Design ◽

And Performance

Many sales, sports, and research contests are put in place to maximize contestants' performance. We investigate and provide a complete characterization of the prize structures that achieve this objective in settings with many contestants. The contestants may be ex ante asymmetric in their abilities and prize valuations, and there may be complete or incomplete information about these parameters. The prize valuations and performance costs may be linear, concave, or convex. A main novel takeaway is that awarding numerous different prizes whose values gradually decline with contestants' ranking is optimal in the typical case of contestants with convex performance costs and concave prize valuations. This suggests that many real‐world contests can be improved by increasing the number of prizes and making them more heterogeneous. The techniques we develop can also be used to formulate and solve other contest design questions that have so far proven intractable.

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