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Transparency and Price Formation

Kaya, Ayca; Liu, Qingmin

We study the role that price transparency plays in determining the efficiency and surplus division in a sequential bargaining model of price formation with symmetric information. Under natural assumptions on type distributions, and for any discount factor, we show that the unobservability of past negotiations leads to lower prices and faster trading. The lack of transparency therefore enhances the "Coasian effect" by fostering efficiency and diverting more of the surplus to the player who possesses private information. In addition, we show that the equilibrium is unique and is in pure strategies in the non-transparent regime; this stands in sharp contrast to the existing literature and allows for a better understanding of the role of transparency.

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Academic Units
Economics
Publisher
Department of Economics, Columbia University
Series
Department of Economics Discussion Papers, 1213-16
Published Here
February 28, 2013
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