Ultimatum Bargaining with Rational Inattention
American Economic Review
vol. 110,
no. 9, September 2020
(pp. 2948-63)
Abstract
A seller bargains with a rationally inattentive buyer (Sims 2003) over a good of random quality. After observing quality, the seller makes a take-it-or-leave-it offer. The buyer pays attention to the seller's product and offer at a cost proportional to expected entropy reduction. Because attention is free off-path, multiple equilibria emerge, many of which are efficient. A trembling-hand-like refinement (Selten 1975) rules out efficiency, delivering complete disagreement when attention is expensive and a unique equilibrium with trade when attention is cheap. In this equilibrium, the buyer overpays for low-quality goods, underpays for high-quality goods, and earns a strictly positive payoff.Citation
Ravid, Doron. 2020. "Ultimatum Bargaining with Rational Inattention." American Economic Review, 110 (9): 2948-63. DOI: 10.1257/aer.20170620Additional Materials
JEL Classification
- C78 Bargaining Theory; Matching Theory
- D82 Asymmetric and Private Information; Mechanism Design
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- D86 Economics of Contract: Theory
- L15 Information and Product Quality; Standardization and Compatibility