Dyadic Processes of Disclosure and Reciprocity in Bargaining with Communication

We offer a study revealing the mechanisms through which communication helps actual bargaining behavior outperform economic predictions. The possibility of individually strategic behavior in the presence of private information leads to game-theoretic predictions of less than full efficiency. We present a one-stage, simultaneous offers bargaining game in which buyers and sellers have independent, privately held valuations for the item being sold (i.e. a bilateral auction with two-sided private information). In three communication treatments, parties are: (a) allowed face-to-face communication prior to submitting offers; (b) allowed written communication prior to submitting offers; or (c) allowed no-communication prior to submitting offers. When parties are allowed pre-play communication, we find nearly full efficiency (98%). We examine two systematically predictable aspects of dyadic interaction - disclosure and reciprocity - to explain how negotiators achieve this efficiency.