DP11276 The Negotiators Who Knew Too Much: Transaction Costs and Incomplete Information

Author(s): Patrick W. Schmitz
Publication Date: May 2016
Keyword(s): Bargaining, incomplete information, joint ownership, Property rights, transaction costs
JEL(s): C78, D23, D86, L14, L24
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11276

Two parties can at some future date 2 negotiate about whether or not to collaborate in order to generate a surplus. Yet, the negotiation stage will be reached only if at date 1 both parties pay their respective transaction costs. We show that the expected total surplus may be larger when at date 1 the parties do not yet know the size of the surplus that can be generated at date 2. Moreover, joint ownership can be optimal under incomplete information even when it would be suboptimal under complete information.