No trade

We investigate a common value bilateral bargaining model with two sided private information and no aggregate uncertainty. A seller owns an asset whose common valuation is a deterministic function of the two traders’private signals. We …rst establish a no-trade theorem for this environment, and proceed to study the e¤ect of the asset valuation structure and the trading mechanism on extent to which asymmetric information induces individuals to engage in mutually unpro…table exchange. A laboratory experiment is conducted, where trade is found to occur between 19% and 35% of the time, and this depends in systematic ways on both the asset valuation function and the trading mechanism. Both buyers and sellers adapt their strategy to changes in the asset valuation function and to changes in the trading mechanism in clearly identi…able ways. An equilibrium model with naïve belief formation accounts for some of the behavioral …ndings, but open questions remain. JEL classi…cation: C78, C92, D82. Keywords: bilateral bargaining, common values, private information, no trade theorem, laboratory experiment. Part of this research was conducted while the …rst author was visiting Caltech. The hospitality of the institution is greatly appreciated. We also gratefully acknowledge the …nancial support of the O¢ ce of the Provost at USC, the Microsoft Corporation (JDC), the National Science Foundation (SES-0450712, SES-0094800, SES-0617820), The Princeton Laboratory for Experimental Social Science, the California Social Science and Experimental Laboratory, and The Gordon and Betty Moore Foundation (TRP). We thank Dustin Beckett, Shivani Nayyar, Uliana Popova, Stephanie Wang, Rumen Zarev and Yi Zhu for research assistance. We are grateful for comments and suggestions by two referees and an editor. Address for correspondence: Juan D. Carrillo, Department of Economics, University of Southern California, Los Angeles, CA 90089, or Thomas R. Palfrey, Division of the Humanities and Social Sciences, California Institute of Technology, Pasadena, CA 91125, .