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Randomly Available Outside Options in Bargaining

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Abstract

We consider an extension of the standard Rubinstein model where both players are randomly allowed to leave the negotiation after a rejection, in which case they obtain a payoff of known value. We show that, when the value of the outside opportunities is of intermediate size, there exist a continuum of subgame-perfect equilibrium outcomes, including some with delayed agreements. Considering outside opportunities of significant value, we prove that efficient delays arise caused by the bargainers' aspirations in waiting for their outside option rather than by threats. Moreover, if taking the outside option decreases the probability that the opponent receives an outside option in the future, then it is possible that exactly two equilibrium payoffs coexist. In this latter case, inefficiencies may be created by agreeing too early.

Suggested Citation

  • Clara Ponsati & Jozsef Sakovics, 2000. "Randomly Available Outside Options in Bargaining," ESE Discussion Papers 63, Edinburgh School of Economics, University of Edinburgh.
  • Handle: RePEc:edn:esedps:63
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    References listed on IDEAS

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    1. Avery Christopher & Zemsky Peter B., 1994. "Option Values and Bargaining Delays," Games and Economic Behavior, Elsevier, vol. 7(2), pages 139-153, September.
    2. Ponsati, C. & sakovics, J., 1996. "Bargaining in a changing Environment," UFAE and IAE Working Papers 351.96, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    3. Vislie, Jon, 1988. "Equilibrium in a market with sequential bargaining and random outside options," Economics Letters, Elsevier, vol. 26(4), pages 325-328.
    4. Sakovics, J. & Ponsati, C., 1995. "Rubinstein Batgaining with Tow-Sided Options," UFAE and IAE Working Papers 318.95, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    5. Shaked, Avner & Sutton, John, 1984. "Involuntary Unemployment as a Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 52(6), pages 1351-1364, November.
    6. Avery Christopher & Zemsky Peter B., 1994. "Money Burning and Multiple Equilibria in Bargaining," Games and Economic Behavior, Elsevier, vol. 7(2), pages 154-168, September.
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    Cited by:

    1. Mercedes Adamuz, 2005. "Opting Out in a War of Attrition," Economics Bulletin, AccessEcon, vol. 3(49), pages 1-6.
    2. Juan Vidal-Puga, 2005. "Reinterpreting the meaning of breakdown," Game Theory and Information 0501004, EconWPA.
    3. Ponsati Clara, 2004. "Search and Bargaining in Large Markets With Homogeneous Traders," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 4(1), pages 1-27, February.
    4. Ali, S. Nageeb M., 2006. "Waiting to settle: Multilateral bargaining with subjective biases," Journal of Economic Theory, Elsevier, vol. 130(1), pages 109-137, September.

    More about this item

    Keywords

    bargaining; outside options;

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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