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Costly Bargaining and Renegotiation - (Now published in Econometrica, 69(4) (March 2001), pp. 377-411.)

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Luca Anderlini
Leonardo Felli

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Abstract

We identify the inefficiencies that arise when negotiation between two parties takes place in the presence of transaction costs. First, for some values of these costs it is efficient to reach an agreement but the unique equilibrium outcome is one in which agreement is never reached. Secondly, even when there are equilibria in which an agreement is reached, we find that the model always has an equilibrium in which agreement is never reached, as well as equilibria in which agreement is delayed for an arbitrary length of time. Finally, the only way in which the parties can reach an agreement in equilibrium is by using inefficient punishments for (some of) the opponent's deviations. We argue that this implies that, when the parties are given the opportunity to renegotiate out of these inefficiencies, the only equilibrium outcome which survives is the one in which agreement is never reached, regardless of the value of the transaction costs.

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Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Theoretical Economics Paper Series with number 361.

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Date of creation: Oct 1998
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Handle: RePEc:cep:stitep:361

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Keywords: Optimal bargaining costs; inefficient bargaining outcomes; renegotiation; imperfect recall;

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  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. Eric Maskin & Jean Tirole, 1997. "Unforseen Contingencies, Property Rights, and Incomplete Contracts," Harvard Institute of Economic Research Working Papers 1796, Harvard - Institute of Economic Research.
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  11. Ausubel, Lawrence M & Deneckere, Raymond J, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Econometrica, Econometric Society, vol. 57(3), pages 511-31, May. [Downloadable!] (restricted)
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  13. Ariel Rubinstein & Asher Wolinsky, 1989. "Renegotiation-Proof Implementation and Time Preferences," Discussion Papers 850, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  14. Dilip Abreu & David Pearce & Ennio Stacchetti, 1989. "Renegotiation and Symmetry in Repeated Games," STICERD - Theoretical Economics Paper Series 198, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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  17. Dewatripont, Mathias, 1989. "Renegotiation and Information Revelation over Time: The Case of Optimal Labor Contracts," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 589-619, August. [Downloadable!] (restricted)
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  22. Dixit, Avinash & Olson, Mancur, 1997. "Does Voluntary Participation Undermine the Coase Theorem?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich.
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  23. Maskin, Eric & Moore, John, 1999. "Implementation and Renegotiation," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 39-56, January. [Downloadable!] (restricted)
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  24. Fudenberg, Drew & Levine, David K & Tirole, Jean, 1987. "Incomplete Information Bargaining with Outside Opportunities," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 37-50, February. [Downloadable!] (restricted)
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  25. Gul, Faruk & Sonnenschein, Hugo & Wilson, Robert, 1986. "Foundations of dynamic monopoly and the coase conjecture," Journal of Economic Theory, Elsevier, vol. 39(1), pages 155-190, June. [Downloadable!] (restricted)
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  27. Abrea Dilip & Pearce David & Stacchetti Ennio, 1993. "Renegotiation and Symmetry in Repeated Games," Journal of Economic Theory, Elsevier, vol. 60(2), pages 217-240, August. [Downloadable!] (restricted)
  28. Joseph Farrell and Eric Maskin., 1987. "Renegotiation in Repeated Games," Economics Working Papers 8759, University of California at Berkeley.
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  29. Chatterjee, Kalyan & Samuelson, Larry, 1987. "Bargaining with Two-Sided Incomplete Information: An Infinite Horizon Model with Alternating Offers," Review of Economic Studies, Blackwell Publishing, vol. 54(2), pages 175-92, April. [Downloadable!] (restricted)
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