Learning before Trading: On the Inefficiency of Ignoring Free Information

This paper analyzes a bilateral trade model in which the buyer’s valuation for the object is uncertain and she can privately purchase any signal about her valuation. The seller makes a take-it-or-leave-it offer to the buyer. The cost of a signal is smooth and increasing in informativeness. We charac...

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Bibliographic Details
Published in:The Journal of political economy 2022-02, Vol.130 (2), p.346-387
Main Authors: Ravid, Doron, Roesler, Anne-Katrin, Szentes, Balázs
Format: Article
Language:English
Subjects:
Economic theory
Learning
Political economy
Trading
Valuation
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Summary:This paper analyzes a bilateral trade model in which the buyer’s valuation for the object is uncertain and she can privately purchase any signal about her valuation. The seller makes a take-it-or-leave-it offer to the buyer. The cost of a signal is smooth and increasing in informativeness. We characterize the set of equilibria when learning is free and show that they are strongly Pareto ranked. Our main result is that when learning is costly but the cost of information goes to zero, equilibria converge to the worst free-learning equilibrium.
ISSN:0022-3808
1537-534X
DOI:10.1086/717350