DP6554 No Trade

Author(s): Juan D Carrillo, Thomas R Palfrey
Publication Date: November 2007
Keyword(s): bilateral bargaining, experimental economics, no-trade theorem, private information
JEL(s): D82, O24, O26
Programme Areas: Public Economics, Financial Economics, Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=6554

We investigate, in a simple bilateral bargaining environment, the extent to which asymmetric information can induce individuals to engage in exchange where trade is not mutually profitable. We first establish a no-trade theorem for this environment. A laboratory experiment is conducted, where trade is found to occur between 16% and 32% of the time, depending on the specific details of the environment and trading mechanism. In most cases, buyers gain from such exchange, at the expense of sellers. An equilibrium model with naive, or 'cursed' beliefs accounts for some of the behaviour findings, but open questions remain.