Bargaining and Welfare: A Dynamic Structural Analysis

Bargaining for retail goods is common in developing countries, but rare in the developed world. The welfare implications of this di erence 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 the participants, then a xed price may be preferable. I develop the tools to resolve this question, specifying a mechanism design problem 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 ∗Preliminary draft: Do not quote.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 Du o, Panle Jia, Michael Peters, Stephen Ryan, Simone Schaner, and Robert Townsend. This paper has also bene ted 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]