Reputational Bargaining and Inefficient Technology Adoption

Abstract

A buyer and a seller bargain over the price of an object. Both players can build reputations for being obstinate by offering the same price over time. Before players bargain, the seller decides whether to adopt a new technology that can lower his cost of production. We show that even when the buyer cannot observe the seller’s adoption decision, players’ reputational incentives can lead to inefficient under-adoption and significant delays in reaching agreement, and that these inefficiencies arise in equilibrium if and only if the social benefit from adoption is large enough. As a result, an increase in the benefit from adoption may lower the probability of adoption.