Status Quo Bias in Bargaining: An Extension of the Myerson-Satterthwaite Theorem with an Application to the Coase Theorem

for valuable discussions and suggestions, and especially Kim Border for pointing us to the right duality results necessary in the proof of part B of our proposition. Abstract We use a generalized version of the Myerson-Satterthwaite theorem to study ineeciencies in bilateral bargaining over trade of an indivisible good, where there is two sided private information on the valuations. We show that when preferences are convex and quasi linear, and when the private information represents the magnitude of the utility gain or loss and follows a uniform distribution, that the most eecient mechanism always exhibits a bias towards the status quo. In the case that utility functions are quadratic in the amount traded, we prove that for any incentive compatible direct mechanism, the expected direction of the ineeciencies is towards the disagreement point. In other words, for the class of preferences we study, there is a strategic advantage to property rights in the Coase bargaining setup in the presence of incomplete information.