EFFICIENT SEQUENTIAL BARGAINING

Suppose that a seller and a buyer have private valuations for a good, and that their respective utilities from a trading mechanism are given by u(s) and u(b). (These utilities are determined by the valuation fo r the good, by whether a trade occurs, and by the price which is paid. ) Consider the problem of maximizing E[lambdau(s) + (I - lambda)u(b)] for some weight lambda in the unit interval. It is shown in this artic le that, if lambda is sufficiently close to zero or one, then the maxi mum value of this objective function attainable by a static revelation mechanism can be arbitrarily closely approximated by equilibria of th e sequential bargaining games in which only a single player makes offe rs. That is, the welfare bound implied by the revelation principle is virtually attainable in offer/counter offer bargaining. The main condi tion needed for this result is a monotone-hazard-rate assumption about the distribution of types. A class of examples is presented in which the result holds for all lambda (i.e. the entire ex ante Pareto fronti er).