Bargaining and Welfare : A Dynamic Structural Analysis of the Autorickshaw Market∗

Bargaining for retail goods is common in developing countries, but rare in the developed world. The welfare implications of this difference are theoretically ambiguous—if bargaining is a low cost form of price discrimination, it may lead to greater trade and welfare and even approximate the optimal incentive compatible outcome. However, if bargaining imposes large utility costs on market participants, then a fixed price may be preferable. I develop the tools to resolve this question, specifying a model of repeated trade with incomplete information adapted to the context of bargaining, and developing a dynamic structural estimation technique to infer the structural parameters of the market. I then apply these techniques to the market for local autorickshaw transportation in Jaipur, India, using data I collected over 2008-2009. ∗Preliminary draft: Do not quote. I am grateful for helpful conversations and suggestions from Abhijit Banerjee, Esther Duflo, Panle Jia, Michael Peters, Stephen Ryan, Simone Schaner, and Robert Townsend. This paper has also benefited from comments during the MIT Development and IO lunch seminars †Department of Economics, Massachusetts Institute of Technology, E53-387, Cambridge, MA 02139. Email: [email protected]