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Bargining and Investment

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  • Francesca Flamini

Abstract

The focus of this paper is on repeated bargaining games in which two parties can decide how much to invest and how to share the remaining surplus for their own consumption. The game is dynamic since the current level of investment affects future surpluses. We characterise an MPE without delays in general terms and show the parametrical effects for the specific case in which parties share the surplus equally. We show that the relatively more patient player invests more than his opponent, for a given capital stock. Moreover, if the probability of becoming a proposer decreases for the more patient player, then such a player reduces his investment, while the relatively impatient player increases his investment.

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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2005_6.

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Handle: RePEc:gla:glaewp:2005_6

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  1. Muthoo Abhinay, 1995. "Bargaining in a Long-Term Relationship with Endogenous Termination," Journal of Economic Theory, Elsevier, vol. 66(2), pages 590-598, August.
  2. F. Gul, 2000. "Unobservable Investment and the Hold-Up Problem," Princeton Economic Theory Papers 00s10, Economics Department, Princeton University.
  3. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, number 9780521576475, April.
  4. Muthoo, Abhinay, 1998. "Sunk Costs and the Inefficiency of Relationship-Specific Investment," Economica, London School of Economics and Political Science, vol. 65(257), pages 97-106, February.
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