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Bargaining over shares of uncertain future profits

Author

Listed:
  • Yigal Gerchak

    (Tel Aviv University)

  • Eugene Khmelnitsky

    (Tel Aviv University)

Abstract

We address the following basic question: How should parties, with possibly different risk-attitudes and beliefs, who are contemplating creating a partnership, divide uncertain future profits? We assume that the formula for division of profits is a result of negotiations, and model it via the Nash-bargaining-like solution (NBLS). After characterizing the optimal contract, using calculus of variations, we assume a linear contract and find its optimal parameters for various cases of interest. We also consider the implications of an asymmetric NBLS.

Suggested Citation

  • Yigal Gerchak & Eugene Khmelnitsky, 2019. "Bargaining over shares of uncertain future profits," EURO Journal on Decision Processes, Springer;EURO - The Association of European Operational Research Societies, vol. 7(1), pages 55-68, May.
    • Handle: RePEc:spr:eurjdp:v:7:y:2019:i:1:d:10.1007_s40070-019-00095-4
    DOI: 10.1007/s40070-019-00095-4
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    References listed on IDEAS

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    4. Kalai, Ehud & Smorodinsky, Meir, 1975. "Other Solutions to Nash's Bargaining Problem," Econometrica, Econometric Society, vol. 43(3), pages 513-518, May.
    5. Brousseau,Eric & Glachant,Jean-Michel (ed.), 2002. "The Economics of Contracts," Cambridge Books, Cambridge University Press, number 9780521814904.
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    7. Lippman, Steven A. & McCardle, Kevin F. & Tang, Christopher S., 2013. "Using Nash bargaining to design project management contracts under cost uncertainty," International Journal of Production Economics, Elsevier, vol. 145(1), pages 199-207.
    8. Brousseau,Eric & Glachant,Jean-Michel (ed.), 2002. "The Economics of Contracts," Cambridge Books, Cambridge University Press, number 9780521893138.
    9. Kadan, Ohad & Swinkels, Jeroen M., 2013. "On the moral hazard problem without the first-order approach," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2313-2343.
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    Cited by:

    1. Palit, Niladri & Brint, Andrew, 2020. "A win-win supply chain solution using project contracts with bargaining games," Operations Research Perspectives, Elsevier, vol. 7(C).
    2. Xiaogang Ma & Chunyu Bao & Jizi Li & Wandong Lou, 2022. "The impact of dual fairness concerns on bargaining game and its dynamic system stability," Annals of Operations Research, Springer, vol. 318(1), pages 357-382, November.

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    Keywords

    Profit sharing; Nash bargaining;

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