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Costly bargaining and renegotiation

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  • Anderlini, Luca
  • Felli, Leonardo

Abstract

We identify the inefficiencies that arise when negotiation between two parties takes place in the presence of transaction costs. First, for some values of these costs it is efficient to reach an agreement but the unique equilibrium outcome is one in which agreement is never reached. Secondly, even when there are equilibria in which an agreement is reached, we find that the model always has an equilibrium in which agreement is never reached, as well as equilibria in which agreement is delayed for an arbitrary length of time. Finally, the only way in which the parties can reach an agreement in equilibrium is by using inefficient punishments for (some of) the opponent’s deviations. We argue that this implies that, when the parties are given the opportunity to renegotiate out of these inefficiencies, the only equilibrium outcome which survives is the one in which agreement is never reached, regardless of the value of the transaction costs.

Suggested Citation

  • Anderlini, Luca & Felli, Leonardo, 1998. "Costly bargaining and renegotiation," LSE Research Online Documents on Economics 3592, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:3592
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    More about this item

    Keywords

    Optimal bargaining costs; inefficient bargaining outcomes; renegotiation; imperfect recall.;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D60 - Microeconomics - - Welfare Economics - - - General

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