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

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Author Info

  • Luca Anderlini
  • Leonardo Felli

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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File URL: http://sticerd.lse.ac.uk/dps/te/te361.pdf
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Bibliographic Info

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
Date of revision:
Handle: RePEc:cep:stitep:361

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Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

Related research

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

References

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  2. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
  3. Benoit, Jean-Pierre & Krishna, Vijay, 1993. "Renegotiation in Finitely Repeated Games," Econometrica, Econometric Society, vol. 61(2), pages 303-23, March.
  4. Maskin, Eric & Moore, John, 1999. "Implementation and Renegotiation," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 39-56, January.
  5. Larry M. Ausubel & Raymond J. Deneckere, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Levine's Working Paper Archive 201, David K. Levine.
  6. Kalyan Chatterjee & Hamid Sabourian, 1998. "Multiperson Bargaining and Strategic Complexity," CRIEFF Discussion Papers 9808, Centre for Research into Industry, Enterprise, Finance and the Firm.
  7. Dixit, Avinash & Olson, Mancur, 2000. "Does voluntary participation undermine the Coase Theorem?," Journal of Public Economics, Elsevier, vol. 76(3), pages 309-335, June.
  8. Hardman Moore, John & Hart, Oliver, 1985. "Incomplete Contracts and Renegotiation," CEPR Discussion Papers 60, C.E.P.R. Discussion Papers.
  9. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
  10. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Econometrica, Econometric Society, vol. 62(2), pages 257-82, March.
  11. Joseph Farrell and Eric Maskin., 1987. "Renegotiation in Repeated Games," Economics Working Papers 8759, University of California at Berkeley.
  12. 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.
  13. Cramton, Peter C, 1992. "Strategic Delay in Bargaining with Two-Sided Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 205-25, January.
  14. Busch, Lutz-Alexander & Wen, Quan, 1995. "Perfect Equilibria in Negotiation Model," Econometrica, Econometric Society, vol. 63(3), pages 545-65, May.
  15. Anderlini, Luca & Felli, Leonardo, 1994. "Incomplete Written Contracts: Undescribable States of Nature," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1085-1124, November.
  16. Grossman, Sanford J. & Perry, Motty, 1986. "Sequential bargaining under asymmetric information," Journal of Economic Theory, Elsevier, vol. 39(1), pages 120-154, June.
  17. Ausubel, Lawrence M & Deneckere, Raymond J, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Econometrica, Econometric Society, vol. 57(3), pages 511-31, May.
  18. 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.
  19. 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.
  20. Sobel, Joel & Takahashi, Ichiro, 1983. "A Multistage Model of Bargaining," Review of Economic Studies, Wiley Blackwell, vol. 50(3), pages 411-26, July.
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  22. 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.
  23. Rubinstein, Ariel & Wolinsky, Asher, 1992. "Renegotiation-Proof Implementation and Time Preferences," American Economic Review, American Economic Association, vol. 82(3), pages 600-614, June.
  24. Raquel Fernandez & Jacob Glazer, 1989. "Striking for a Bargain Between Two Completely Informed Agents," NBER Working Papers 3108, National Bureau of Economic Research, Inc.
  25. Rubinstein, Ariel, 1995. "On the Interpretation of Decision Problems with Imperfect Recall," Mathematical Social Sciences, Elsevier, vol. 30(3), pages 324-324, December.
  26. Chatterjee, Kalyan & Samuelson, Larry, 1987. "Bargaining with Two-Sided Incomplete Information: An Infinite Horizon Model with Alternating Offers," Review of Economic Studies, Wiley Blackwell, vol. 54(2), pages 175-92, April.
  27. W. Bentley MacLeod, 1997. "Complexity, Contract and the Employment Relationship," Boston College Working Papers in Economics 342., Boston College Department of Economics.
  28. 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.
  29. 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.
  30. Admati, Anat R & Perry, Motty, 1987. "Strategic Delay in Bargaining," Review of Economic Studies, Wiley Blackwell, vol. 54(3), pages 345-64, July.
  31. Fudenberg, Drew & Tirole, Jean, 1991. "Perfect Bayesian equilibrium and sequential equilibrium," Journal of Economic Theory, Elsevier, vol. 53(2), pages 236-260, April.
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