Here is a puzzle: You meet a real estate agent for a property you are interested in. The house has an asking prize and you haven’t made any offers yet. The realtor mentions casually that she has just had an offer for the house which she has rejected. Would you ask what the offer was? Would the realtor tell you? Is it a fair question to ask? (obviously, the realtor is under no obligation to reveal the truth value of the rejected offer and there is no way for me to verify the answer).
Here is a formalized description of the problem: the Seller adn the Buyer can be each of two types – High or Low. High Buyers and Sellers prefer High Deal to No Deal no Low Deal, and Low Buyers and Sellers prefer High Deal to Low Deal to No Deal. First, the Seller announces whether she has rejected a Very low or a Moderate offer. If a Moderate offer has been (announced as) rejected, the Buyer can make either a High offer (which all Sellers accept) or No offer which ends the game. If a Very low offer has been (announced as) rejected, the Buyer can make a Low offer, No offer or a High offer (the latter two end the game). If a Low offer has been made, the Seller can either Accept or Reject it. In the case of rejection the Buyer can make a High offer or No offer – both actions end the game. Here is the game tree.
Essentially, by making an announcement that she has rejected a Moderate offer the Seller credibly commits to reject any Low offers. Importantly, Buyers suffer a cost from a rejected offer (which is realistic given the costs of the compulsory technical surveys one has to do before an offer). There is no penalty for a late deal (no time discounting). The game is of two-sided incomplete information – neither the Buyers nor the Sellers know the type of the opponent. So the questions:
1) Should you ask what the rejected offer was?
2) Should the realtor (the Seller) tell you?
3) Would the answer (announcement) of the Seller be informative?
4) Does the Seller do better under this game or a game with no signal (announcement)?
5) Does the Buyer do better under this game or a game with no signal?
6) Is this game Pareto-improving under any circumstances?
My answers are after the fold.
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