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Dynamic Accumulation in Bargaining Games

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  • Francesca Flamini

Abstract

In many bargaining situations the decisions that parties take at one point in time affect their future bargaining opportunities. We consider an ultimatum bargaining game in which parties can decide not only how to share a current surplus but also how much to invest in order to generate future surpluses. We show that there is a unique Markov perfect equilibrium (MPE) in which a proposer consumes the whole surplus not invested. Moreover, when the proposer has a sufficiently high discount factor, his MPE investment level is higher than his opponent’s, for a given capital stock. Finally, we show that bargaining can lead to overinvestment.

Suggested Citation

  • Francesca Flamini, 2002. "Dynamic Accumulation in Bargaining Games," Working Papers 2002_5, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2002_5
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    File URL: http://www.gla.ac.uk/media/media_22251_en.pdf
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    References listed on IDEAS

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    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, number 9780521576475, January.
    3. Abhinay Muthoo, 1998. "Sunk Costs and the Inefficiency of Relationship‐Specific Investment," Economica, London School of Economics and Political Science, vol. 65(257), pages 97-106, February.
    4. Muthoo Abhinay, 1995. "Bargaining in a Long-Term Relationship with Endogenous Termination," Journal of Economic Theory, Elsevier, vol. 66(2), pages 590-598, August.
    5. Harold L. Cole & George J. Mailath & Andrew Postlewaite, "undated". "Efficient Non-Contractible Investments," Penn CARESS Working Papers 08d6793d32cab8f6e1f46dac0, Penn Economics Department.
    6. Maskin, Eric & Tirole, Jean, 2001. "Markov Perfect Equilibrium: I. Observable Actions," Journal of Economic Theory, Elsevier, vol. 100(2), pages 191-219, October.
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    Cited by:

    1. Sorger, Gerhard, 2006. "Recursive Nash bargaining over a productive asset," Journal of Economic Dynamics and Control, Elsevier, vol. 30(12), pages 2637-2659, December.

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