Evolutionary stability of bargaining and price posting: implications for formal and informal activities
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In this paper we study the co-existence of two well known trading protocols, bargaining and price-posting. To do so we consider a frictional environment where buyers and sellers play price-posting and bargaining games infinitely many times. Sellers switch from one market to the other at a rate that is proportional to their payoff differentials. Given the different informational requirements associated with these two trading mechanisms, we examine their possible co-existence in the context of informal and formal markets. Other than having different trading protocols, we also consider other distinguishing features. We find a unique stable equilibrium where price-posting (formal markets) and bargaining (informal markets) co-exist. In a richer environment where both sellers and buyers can move across markets, we show that there exists a unique stable dynamic equilibrium where formal and informal activities also co-exist whenever sellers’ and buyers’ net costs of trading in the formal market have opposite signs.
KeywordsPrice posting Bargaining Formal and informal sectors
JEL ClassificationC7 D49 E26 C78
This paper was previously circulated under two different titles: (i) “Formal and Informal Markets: A Strategic and Dynamic Perspective” and (ii) “Formal and Informal Markets: A Strategic and Evolutionary Perspective”.
We would like to thank Nick Feltovich, Lawrence Uren and the participants of the 2012 Australasian Economic Theory Workshop and of the 2012 Australasian Public Choice Conference as well as the seminar participants at Australian National University, Deakin University, La Trobe University, Virginia Tech and anonymous referees for their comments and suggestions. Finally, we would also like to thank the anonymous referees for their input and suggestions. This work was supported by NSERC grant #262620-2008 and Labex MME-DII (ANR11-LBX-0023-01).
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