No Trade

36 Pages Posted: 6 Jun 2008

See all articles by Juan D. Carrillo

Juan D. Carrillo

University of Southern California - Department of Economics; Centre for Economic Policy Research (CEPR)

Thomas R. Palfrey

California Institute of Technology - Division of the Humanities and Social Sciences

Date Written: November 2007

Abstract

We investigate, in a simple bilateral bargaining environment, the extent to which asymmetric information can induce individuals to engage in exchange where trade is not mutually profitable. We first establish a no-trade theorem for this environment. A laboratory experiment is conducted, where trade is found to occur between 16% and 32% of the time, depending on the specific details of the environment and trading mechanism. In most cases, buyers gain from such exchange, at the expense of sellers. An equilibrium model with naive, or 'cursed' beliefs accounts for some of the behaviour findings, but open questions remain.

Keywords: bilateral bargaining, experimental economics, no-trade theorem, private information

JEL Classification: D82, O24, O26

Suggested Citation

Carrillo, Juan D. and Palfrey, Thomas R., No Trade (November 2007). CEPR Discussion Paper No. DP6554, Available at SSRN: https://ssrn.com/abstract=1140081

Juan D. Carrillo (Contact Author)

University of Southern California - Department of Economics ( email )

3022 S. Vermont Ave.
Los Angeles, CA 90089
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Thomas R. Palfrey

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

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Pasadena, CA 91125
United States
626-395-4088 (Phone)
626-4432-1726 (Fax)

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