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Bilateral bargaining, unverifiable quality, and options to return

Author

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  • Anke Kessler
  • Christoph Lülfesmann
Abstract
The paper investigates an alternating-offers bargaining game between a buyer and a seller who face several trading opportunities. These items (goods or services) differ in their non-verifiable quality characteristics which gives rise to a moral hazard problem on the seller's part. For the special case of two goods, we completely characterize the set of subgame-perfect equilibria. We find that the seller always extends an option to return the good, while the buyer may suffer from this warranty. Also, qualitatively different types of equilibrium outcomes occur depending on the parameters of the model: (a) the seller may obtain a larger share of the surplus although the parties ex ante have symmetric bargaining positions, (b) the subgame-perfect equilibrium may entail inefficient trade, and (c) multiple equilibria may exist including equilibria with delay in negotiations. Finally, we analyze a situation where bargaining proceeds after the good was returned which is shown to reestablish uniqueness and efficiency of equilibrium. Copyright Springer-Verlag Berlin/Heidelberg 2004

Suggested Citation

  • Anke Kessler & Christoph Lülfesmann, 2004. "Bilateral bargaining, unverifiable quality, and options to return," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 23(2), pages 395-410, January.
    • Handle: RePEc:spr:joecth:v:23:y:2004:i:2:p:395-410
    DOI: 10.1007/s00199-003-0387-y
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    Citations

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    Cited by:

    1. James Andreoni, 2018. "Satisfaction Guaranteed: When Moral Hazard Meets Moral Preferences," American Economic Journal: Microeconomics, American Economic Association, vol. 10(4), pages 159-189, November.
    2. Annen, Kurt, 2006. "Social Capital in the Urban Informal Sector in Developing Countries – Micro Evidence from Small Textile Producers in Bolivia," Documentos de trabajo 3/2006, Instituto de Investigaciones Socio-Económicas (IISEC), Universidad Católica Boliviana.
    3. Gian Luigi Albano & Berardino Cesi & Alberto Iozzi, 2023. "Teaching an old dog a new trick: Reserve price and unverifiable quality in repeated procurement," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 32(2), pages 377-399, April.
    4. Albano, Gian Luigi & Cesi, Berardino & Iozzi, Alberto, 2017. "Public procurement with unverifiable quality: The case for discriminatory competitive procedures," Journal of Public Economics, Elsevier, vol. 145(C), pages 14-26.
    5. Annen, Kurt, 2013. "Social capital as a substitute for formality: Evidence from Bolivia," European Journal of Political Economy, Elsevier, vol. 31(C), pages 82-92.
    6. James Andreoni, 2005. "Trust, Reciprocity, and Contract Enforcement: Experiments on Satisfaction Guaranteed," Levine's Bibliography 666156000000000679, UCLA Department of Economics.

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