We examine what happens if, as players bargain, they can exert costly effort to expand the set of possible proposals. With side payments, new ideas influence the size of the pie but not its division. The benefits of one player's creativity are shared with the other player, so effort is inefficiently low. Without side payments, new ideas do influence the distribution, so players inefficiently limit their search to ideas that favor them. Getting an idea makes an agreement more likely, but it also makes the other player's ideas less likely to be adopted. Consequently, effort can be either excessive or suboptimal.
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|Date of creation:||01 Jan 1998|
|Publication status:||Published in Games and Economic Behavior 1998,, pp. 43-53|
|Contact details of provider:|| Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070|
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