Ex Post (In) Efficient Negotiation and Breakdown of Trade

Using a novel audit methodology, we show that reputation concerns and norms against price gouging can lead to breakdown in ex post efficient trade. Sellers in a market in India do not use their increased bargaining power to charge higher prices when customers have a shock, but, rather, forgo the order. However, when customers offer a higher price, sellers are significantly more likely to accept the order. When reputation costs are lower (out of state customers), sellers are more willing to initiate renegotiation. These results suggest that there are first order distortions to ex post efficient renegotiation. * Iyer: MIT Sloan School of Management, email: [email protected]; Schoar: MIT Sloan School of Management, CEPR and NBER, email: [email protected]. We thank Sharon Bateau, and especially Sandhya Kumar for excellent research assistance. The Institute for Financial Markets Research in Chennai, India provided financial support. We would like to thank Nittai Bergman, Bob Gibbons, Mara Lederman, Bentley MacLeod, Klaus Schmidt, Steve Tadelis, and Jean Tirole for their comments. We would also like to thank seminar and conference participants at AEA, Columbia University, London School of Economics, MIT, NBER Organizational Economics meetings, Toulouse University and Yale University. All errors are our own.