Reputational Bargaining and Inefficient Technology Adoption

TL;DR

This paper models bargaining dynamics where reputational incentives influence technology adoption, revealing that higher social benefits can paradoxically reduce adoption rates and social welfare due to strategic behavior.

Contribution

It demonstrates how reputational considerations in bargaining can cause inefficient technology adoption and delays, even when adoption benefits are high.

Findings

Reputational incentives can lead to under-adoption of new technology.

Higher social benefits may decrease the likelihood of adoption.

Adoption delays can occur even without observable adoption decisions.

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. Our result implies that an increase in the benefit from adoption may lower the probability of adoption and that the seller's opportunity to adopt a cost-saving technology may lower social welfare.