Driving a Bargain: Negotiation Skill and Price Dispersion

We show that individual negotiation skills affect equilibrium prices in societally important contracting. We develop a novel measure of managers’ bargaining ability from private vehicle transactions and link it to proprietary data on negotiated hospital prices. Higher-skilled managers negotiate better prices, suggesting negotiation skill is a portable asset. Management turnovers and shocks to insurer bargaining positions support this interpretation. We estimate a model to quantify the role of individual skill and find heterogeneity in negotiation skills explains 37% of the price dispersion attributed to differences in hospitals’ bargaining power. Overall, human capital is an important determinant of market-wide price dispersion.