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Optimism and Bargaining Inefficiency

Author

Listed:
  • Li Duozhe

    (Chinese University of Hong Kong, duozheli@cuhk.edu.hk)

  • Wong Yat Fung

    (Chinese University of Hong Kong, yat_fung@cuhk.edu.hk)

Abstract

In a modified version of Rubinstein's bargaining game, two players expect the random arrival of a third party, from whom one of them will receive an interim disagreement payoff in every period until an agreement is finally reached. Each player thinks that his own probability of receiving the disagreement payoff is greater than that assessed by the other player; that is, they are mutually optimistic. We show that when the level of optimism is high and not very durable, equilibrium agreement is delayed until the uncertainty is fully resolved. The efficiency loss caused by such a delay remains substantial when the players are extremely patient.

Suggested Citation

  • Li Duozhe & Wong Yat Fung, 2009. "Optimism and Bargaining Inefficiency," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-14, April.
    • Handle: RePEc:bpj:bejtec:v:9:y:2009:i:1:n:12
    DOI: 10.2202/1935-1704.1516
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    References listed on IDEAS

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    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
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    Cited by:

    1. Mihai Manea, 2011. "Bargaining in Stationary Networks," American Economic Review, American Economic Association, vol. 101(5), pages 2042-2080, August.
    2. Dongkyu Chang & Duk Gyoo Kim & Wooyoung Lim, 2022. "Positive and Negative Selection in Bargaining: An Experiment," CESifo Working Paper Series 9908, CESifo.
    3. Zhongwei Feng & Chunqiao Tan & Jinchun Zhang & Qiang Zeng, 2021. "Bargaining Game with Altruistic and Spiteful Preferences," Group Decision and Negotiation, Springer, vol. 30(2), pages 277-300, April.

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