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Negotiated Contracts Can Be Inefficient

Author

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  • Milan Horniaček

Abstract

The paper analyzes negotiation about contracts between the buyer and the seller. A contract specifies the quantity delivered by the seller and the buyer's payment for each period within its time horizon. In each period without a valid contract any party can withdraw from negotiation forever. Any strictly individually rational payoff vector obtainable from single period trade can be equilibrium payoff vector in some subgame perfect equilibrium if discount factor is close enough to one. Every sub game perfect equilibrium, in which neither party's strategy depends on past rejected proposals, is dynamically weakly Pareto efficient.

Suggested Citation

  • Milan Horniaček, 2004. "Negotiated Contracts Can Be Inefficient," Bulletin of the Czech Econometric Society, The Czech Econometric Society, vol. 11(20).
  • Handle: RePEc:czx:journl:v:11:y:2004:i:20:id:134
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    File URL: http://ces.utia.cas.cz/bulletin/index.php/bulletin/article/view/134
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    More about this item

    Keywords

    contract; negotiation; Markov strategy; Pareto efficiency;

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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