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Efficiency in Negotiation: Complexity and Costly Bargaining

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  • Jihong Lee

    (Department of Economics, Mathematics & Statistics, Birkbeck)

  • Hamid Sabourian

Abstract

Even with complete information, two-person bargaining can generate a large number of equilibria, involving disagreements and inefficiencies, in (i) negotiation games where disagreement payoffs are endogenously determined (Busch and Wen, 1995) and (ii) costly bargaining games where there are transaction/participation costs (Anderlini and Felli, 2001). We show that when the players have (at the margin) a preference for less complex strategies only efficient equilibria survive in negotiation games (with sufficiently patient players) while, in sharp contrast, it is only the most inefficient outcome involving perpetual disagreement that survives in costly bargaining games. We also find that introducing small transaction costs to negotiation games dramatically alters the selection result: perpetual disagreement becomes the only feasible equilibrium outcome. Thus, in both alternating-offers bargaining games and repeated games with exit options (via bargaining and contracts), complexity considerations establish that the Coase Theorem is valid if and only if there are no transaction/participation costs.

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File URL: http://www.ems.bbk.ac.uk/research/wp/PDF/BWPEF0505.pdf
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Bibliographic Info

Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0505.

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Date of creation: Feb 2005
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Handle: RePEc:bbk:bbkefp:0505

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Related research

Keywords: Bargaining; Repeated Game; Coase Theorem; Transaction Cost; Complexity; Bounded Rationality; Automaton;

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References

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  1. Kalyan Chatterjee & Hamid Sabourian, 2000. "Multiperson Bargaining and Strategic Complexity," Econometrica, Econometric Society, vol. 68(6), pages 1491-1510, November.
  2. Chatterjee, K. & Sabourian, S., 1999. "N-Person Bargaining and Strategic Complexity," Papers 5-99-1, Pennsylvania State - Department of Economics.
  3. Busch, L-A. & Wen, Q., 1991. "Perfect Equilibria in a Negotiation Model," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9108, University of Western Ontario, The Centre for the Study of International Economic Relations.
  4. Ausubel, Lawrence M. & Cramton, Peter & Deneckere, Raymond J., 2002. "Bargaining with incomplete information," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 3, chapter 50, pages 1897-1945 Elsevier.
  5. Martin J Osborne & Ariel Rubinstein, 2009. "A Course in Game Theory," Levine's Bibliography 814577000000000225, UCLA Department of Economics.
  6. Haller, Hans & Holden, Steinar, 1990. "A letter to the editor on wage bargaining," Journal of Economic Theory, Elsevier, vol. 52(1), pages 232-236, October.
  7. Luca Anderlini & Leonardo Felli, 1999. "Costly Bargaining and Renegotiation," CESifo Working Paper Series 213, CESifo Group Munich.
  8. Binmore, Ken & Piccione, Michele & Samuelson, Larry, 1998. "Evolutionary Stability in Alternating-Offers Bargaining Games," Journal of Economic Theory, Elsevier, vol. 80(2), pages 257-291, June.
  9. Raquel Fernandez & Jacob Glazer, 1989. "Striking for a Bargain Between Two Completely Informed Agents," NBER Working Papers 3108, National Bureau of Economic Research, Inc.
  10. Hamid Sabourian & Jihong Lee, 2004. "Complexity and Efficiency in Repeated Games with Negotiation," Econometric Society 2004 North American Summer Meetings 58, Econometric Society.
  11. Fershtman Chaim & Seidmann Daniel J., 1993. "Deadline Effects and Inefficient Delay in Bargaining with Endogenous Commitment," Journal of Economic Theory, Elsevier, vol. 60(2), pages 306-321, August.
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  17. Sakovics Jozsef, 1993. "Delay in Bargaining Games with Complete Information," Journal of Economic Theory, Elsevier, vol. 59(1), pages 78-95, February.
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  24. Piccione, M. & Rubinstein, A., 1992. "Finite Automata Play A Repeated Extensive Game," Papers 5-92, Tel Aviv.
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Cited by:
  1. Lee, Jihong & Sabourian, Hamid, 2007. "Coase theorem, complexity and transaction costs," Journal of Economic Theory, Elsevier, vol. 135(1), pages 214-235, July.

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