The information advantage in two-person bargaining with incomplete information

The sealed-bid k-double auction is a mechanism used to structure bilateral bargaining under two-sided incomplete information. Tn the process of testing whether or not the observed bid and ask functions are in agreement with the Bayesian linear equilibrium solution under asymmetric information conditions, we find a strong information disparity effect. The trader favored by the information disparity, whether buyer or seller, receives a significantly larger share of the realized gains from trade than that predicted by the theory. A reinforcement-based learning model is formulated and tested. It accounts successfully fur most of the variability in the round-to-round individual decisions. (C) 2001 Elsevier Science B.V. All rights reserved. JEL classification: c72: c92.