Information Acquisition and Efficient Bargaining

In most existing models of bargaining it is assumed that traders know how much they value the object they are bargaining over. However, we observe in practice that economic agents often dedicate time and resources into learning the characteristics of goods and services they are considering to trade. For instance, imagine a consulting firm pitching a project to a potential customer. While the deliverables may be clear, the firm may not know exactly how costly they will be to complete; similarly, the buyer may not know exactly how much benefit they will get. Prior to negotiations, both sides may choose to invest time and resources in sharpening their estimate. This project examines the effect of endogenous private information on bilateral bargaining with independent private values. Specifically, our goal is to analyze how the possibility of acquiring information about own’s valuation affects bargaining outcomes and how the choice of a bargaining mechanism influences information acquisition decisions. While Bergemann and Välimäki (2002) show that, with independent private values, the Vickrey-Clark-Groves mechanism attains both ex post efficiency and optimal information acquisition, it is already known that ex post efficiency is not attainable in bilateral bargaining (Myerson and Satterthwaite (1983)) due to binding budget balance and individual rationality constraints. Given this, important questions arise when the agents have the option of (costly) information acquisition before engaging in bargaining: