Common Knowledge As A Barrier To Negotiation

Ian Ayres
Yale University – Yale Law School; Yale University – Yale School of Management

Barry J. Nalebuff
Yale University – Yale School of Management

April 1997

Yale ICF Working Paper No. 97-01

Abstract:

When we disclose information, we may also communicate information about information. The listener learns not only X but also that the speaker knows X. And the speaker also learns by speaking (for example, the speaker knows that the listener knows X). In this paper we present a series of examples where negotiators want to communciate X, but do not want to comunicate higher-order information about X.

While it may be efficient for one negotiator to tell another the true consequences of failing to reach agreement, when such information is threatening or insulting it may be useful to prevent the threat or insult from becoming common knowledge. Game-theorists often model private information as the but-for cause of inefficient distributive bargaining. In these simple bargaining models, if each side’s BATNA were common knowledge, the parties would instantaneously (and costlessly) reach agreement. But we show that while the lack of first-order information can impede trade, the presence of higher-order information (information about information) might be a barrier to negotiation, a transaction cost that might be avoided by ambiguous or indirect communication or by caucus mediation.

Common Knowledge As A Barrier To Negotiation

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