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Communication in bargaining over decision rights

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  • Lim, Wooyoung

Abstract

This paper develops a model of bargaining over decision rights between an uninformed principal and an informed but self-interested agent. We introduce two different bargaining mechanisms: tacit and explicit bargaining. In tacit bargaining, an uninformed principal makes a take-it-or-leave-it price offer to the agent, who then decides whether to accept or reject the offer. In the equilibrium of the game, the principal inefficiently screens out some agent types so that the agent's private information cannot be fully utilized when the decision is made. In explicit bargaining in which parties can communicate explicitly via cheap talk before tacit bargaining, however, an equilibrium with no such inefficient screening exists even when the conflict of interest is arbitrarily large. We also follow a mechanism design approach, showing that under certain conditions, explicit bargaining is an optimal bargaining mechanism that maximizes the joint surplus of the parties.

Suggested Citation

  • Lim, Wooyoung, 2014. "Communication in bargaining over decision rights," Games and Economic Behavior, Elsevier, vol. 85(C), pages 159-179.
  • Handle: RePEc:eee:gamebe:v:85:y:2014:i:c:p:159-179
    DOI: 10.1016/j.geb.2014.02.002
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    Keywords

    Decision rights; Delegation; Monetary transfer; Cheap talk;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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