No trade

We investigate a common value bilateral bargaining model with two-sided private information and no aggregate uncertainty. A seller owns an asset whose common valuation is a deterministic function of the two traders' private signals. We first establish a notrade theorem for this environment, and proceed to study the effect of the asset valuation structure and the trading mechanism on extent to which asymmetric information induces individuals to engage in mutually unprofitable exchange. A laboratory experiment is conducted, where trade is found to occur between 19% and 35% of the time, and this depends in systematic ways on both the asset valuation function and the trading mechanism. Both buyers and sellers adapt their strategy to changes in the asset valuation function and to changes in the trading mechanism in clearly identifiable ways. An equilibrium model with naive belief formation accounts for some of the behavioral findings, but open questions remain. (C) 2010 Elsevier Inc. All rights reserved.