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Efficiency in Negotiation: Complexity and Costly Bargaining

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Author Info
Jihong Lee (Department of Economics, Mathematics & Statistics, Birkbeck)
Hamid Sabourian

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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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Publisher 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;

Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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References listed on IDEAS
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  1. Martin J. Osborne & Ariel Rubinstein, 1994. "A Course in Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262650401.
    Other versions:
  2. Douglas Gale & Hamid Sabourian, 2005. "Complexity and Competition," Econometrica, Econometric Society, vol. 73(3), pages 739-769, 05. [Downloadable!] (restricted)
  3. Busch, Lutz-Alexander & Wen, Quan, 1995. "Perfect Equilibria in Negotiation Model," Econometrica, Econometric Society, vol. 63(3), pages 545-65, May. [Downloadable!] (restricted)
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  4. 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. [Downloadable!] (restricted)
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  5. Sakovics Jozsef, 1993. "Delay in Bargaining Games with Complete Information," Journal of Economic Theory, Elsevier, vol. 59(1), pages 78-95, February. [Downloadable!] (restricted)
  6. Nash, John, 1953. "Two-Person Cooperative Games," Econometrica, Econometric Society, vol. 21(1), pages 128-140, April. [Downloadable!] (restricted)
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  8. Piccione, M. & Rubinstein, A., 1992. "Finite Automata Play A Repeated Extensive Game," Papers 5-92, Tel Aviv.
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  11. Anderlini, Luca & Felli, Leonardo, 2001. "Costly Bargaining and Renegotiation," Econometrica, Econometric Society, vol. 69(2), pages 377-411, March.
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  12. Piccione, Michele, 1992. "Finite automata equilibria with discounting," Journal of Economic Theory, Elsevier, vol. 56(1), pages 180-193, February. [Downloadable!] (restricted)
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  16. Sabourian, Hamid, 2004. "Bargaining and markets: complexity and the competitive outcome," Journal of Economic Theory, Elsevier, vol. 116(2), pages 189-228, June. [Downloadable!] (restricted)
  17. repec:att:wimass:19963r is not listed on IDEAS
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  19. Piccione Michele & Rubinstein Ariel, 1993. "Finite Automata Play a Repeated Extensive Game," Journal of Economic Theory, Elsevier, vol. 61(1), pages 160-168, October. [Downloadable!] (restricted)
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  20. Perry Motty & Reny Philip J., 1993. "A Non-cooperative Bargaining Model with Strategically Timed Offers," Journal of Economic Theory, Elsevier, vol. 59(1), pages 50-77, February. [Downloadable!] (restricted)
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  22. Kalai, Ehud & Stanford, William, 1988. "Finite Rationality and Interpersonal Complexity in Repeated Games," Econometrica, Econometric Society, vol. 56(2), pages 397-410, March. [Downloadable!] (restricted)
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  23. Fernandez, Raquel & Glazer, Jacob, 1991. "Striking for a Bargain between Two Completely Informed Agents," American Economic Review, American Economic Association, vol. 81(1), pages 240-52, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Elizabeth M. Ueckermann & James N. Blignaut & Rangan Gupta, 2007. "A Panel Bargaining Model within the Regional Boundaries of the South African Grain Industry," Working Papers 200706, University of Pretoria, Department of Economics.
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