How Communication Improves Efficiency in Bargaining: Reconciling Theory with Evidence

Previous theoretical literature proved the existence of an upper bound on efficiency in bilateral bargaining. In contrast, experiments consistently find players obtaining higher efficiency than the upper bound if they are allowed to communicate before the 12 -double auction. We bridge this gap between theory and experiments by introducing an proportion of behavioral-type players who always truthfully reveal their valua- tions and declare a keenness to trade before bidding in the 12 -double auction. Preplay communication is used by the strategic types to communicate their “tougher” bargain- ing position, forcing the behavioral types to adopt a “weaker” position. This further induces the strategic types to decrease the shading/exaggeration in the announcement of their valuations lest they miss the chance to trade with the “weaker” behavioral types.