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Bargaining under liquidity constraints: Unified strategic foundations of the Nash and Kalai solutions

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  • Hu, Tai-Wei
  • Rocheteau, Guillaume

Abstract

We provide unified strategic foundations for the Nash (1950) and Kalai (1977) solutions in the context of negotiations under liquidity constraints. We propose an N-round game where in each round a seller and a buyer with limited payment capacity negotiate a bundle of divisible goods, where bundle sizes can vary across rounds, according to Rubinstein's (1982) alternating-offer game. The game implements the Nash solution if N=1 and the Kalai solution if N=+∞ and bundle sizes are infinitesimal. If N is set by one player ex ante, the buyer chooses N=1 while the seller chooses N=+∞. We endogenize liquidity constraints and show they bind for all N<+∞, even when there is no cost in holding liquidity.

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  • Hu, Tai-Wei & Rocheteau, Guillaume, 2020. "Bargaining under liquidity constraints: Unified strategic foundations of the Nash and Kalai solutions," Journal of Economic Theory, Elsevier, vol. 189(C).
    • Handle: RePEc:eee:jetheo:v:189:y:2020:i:c:s0022053120300910
    DOI: 10.1016/j.jet.2020.105098
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    More about this item

    Keywords

    Bargaining with an agenda; Nash program; Bargaining solution;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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