BARGAINING PROCEDURES THAT INDUCE HONESTY

When bargaining between two actors over an object is modeled as a nonc ooperative game of incomplete information, equilibrium bids generally involve misrepresentation of the players' true values. But the bargain ers' payoffs can be modified so that truthfully revealing one's reserv ation price is a dominant strategy. While such modifications define ba rgaining procedures that induce honesty in bidding and thereby avoid a n inefficient outcome, these procedures may be vulnerable to other dif ficulties. The procedures analyzed are the following: Bonus Procedure: the players share a bonus equal to the overlap in their bids, wheneve r a settlement is feasible; Penalty Procedure: the settlement is reduc ed (usually probabilistically) to a level proportionate to the overlap of the bids, whenever a settlement is feasible; Appraisal Procedure: there is a settlement when, and only when, an independent appraisal is above the seller's and below the buyer's bid. The appraisal value is then the exchange price; Expansive Appraisal Procedure: there is a set tlement at the appraised value, unless it is unfavorable to both the b uyer and the seller. These honesty-inducing procedures are evaluated a ccording to several criteria, namely, efficiency in achieving feasible trades, ability to be self-financing (rather than requiring a subsidy ), vulnerability to collusion, and compatibility with each player's in dividual interests. Besides these theoretical assessments, practical c onsiderations, including the need for a settlement, the means of imple mentation, and so on, are discussed.