An Offer You Can't Refuse: Early Contracting with Endogenous Threat
Bruno Jullien, Jérôme Pouyet, and Wilfried Sand-Zantman
IDEI Working Paper
n. 783, May 2013, revised June 2014
Bruno Jullien, Jérôme Pouyet, and Wilfried Sand-Zantman, “An Offer You Can't Refuse: Early Contracting with Endogenous Threat”, IDEI Working Paper, n. 783, May 2013, revised June 2014.
We analyze early contracting when a seller has private information on the future gains from trade and the buyer can bypass. Despite ex-post trade occurring under complete information and being efficient, early negotiation with an informed seller allows the uninformed buyer to improve her bargaining position. We show that the buyer can divide seller's types so that bypass becomes a credible threat. While some sellers accept because they gain more than by trading ex-post, others accept only because they fear that rejection would reveal too much information. Equilibrium payoffs are characterized and are shown to have a close connection with ratifiable equilibrium payoffs.