Bargaining with Behavioral Players: Strategic Deception and More Trade

Previous literature proved the existence of an upper bound on the probability of trade in a bilateral trading problem when the valuations are distributed uniformly on [0,1]. This upper bound is achieved in the ½-double auction when the players play the Chatterjee-Samuelson strategies. We introduce behavioral-type players in a ½-double auction preceded by cheap talk. The behavioral-type players always declare a keenness to trade in the cheap-talk stage and play the Chatterjee-Samuelson strategies if they hear the “Keen” message. In equilibrium, the probability of trade between the strategic types increases monotonically as the probability of the behavioral types increases. If the probability of the behavioral types is high enough, the probability of trade between the strategic types is greater than the upper bound.