Evolutionary stability of bargaining and price posting: implications for formal and informal activities |
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Authors: | Nejat Anbarci Pedro Gomis-Porqueras Marcus Pivato |
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Affiliation: | 1.Department of Economics,Deakin University,Burwood,Australia;2.Department of Mathematics at Trent University,Peterborough,Canada;3.THEMA,Université de Cergy-Pontoise,Cergy-Pontoise cedex,France |
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Abstract: | In this paper we study the co-existence of two well known trading protocols, bargaining and price-posting. To do so we consider a frictional environment where buyers and sellers play price-posting and bargaining games infinitely many times. Sellers switch from one market to the other at a rate that is proportional to their payoff differentials. Given the different informational requirements associated with these two trading mechanisms, we examine their possible co-existence in the context of informal and formal markets. Other than having different trading protocols, we also consider other distinguishing features. We find a unique stable equilibrium where price-posting (formal markets) and bargaining (informal markets) co-exist. In a richer environment where both sellers and buyers can move across markets, we show that there exists a unique stable dynamic equilibrium where formal and informal activities also co-exist whenever sellers’ and buyers’ net costs of trading in the formal market have opposite signs. |
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