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Gotta' Have Money to Make Money? Theory and Evidence Linking Financial Need with The Bargaining Behavior of Microentrepreneurs

Although haggling over the prices of goods and services is an integral part of life for the world's poor, little work has been done to extend bargaining models to a developing country context. We develop a theoretical model of bargaining that takes into account the initial endowment of the seller. Our model predicts that sellers with lower initial endowment will settle for a lower price. We test our model using data from a bargaining exercise over a real product, a child's shirt, with garment making microenterprises in Ghana. Our data supports the major testable prediction from our model: sellers from poorer households agree to a lower price than rich sellers. This relationship is robust to controlling for a number of potentially confounding firm and owner characteristics, including firm size and product quality. Preliminary findings from a lab-in-the-field experiment, in which we randomly assign initial endowments in a bargaining game that mirrors the shirt exercise, appear to corroborate our results. We conclude that further exploration of this ``need-bargaining'' relationship is a key frontier in future bargaining research aimed at understanding the lives of the poor.