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Optimal Delegation in Nash Bargaining

Author

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  • Roland Kirstein

    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

Abstract

When appointing a representative in negotiations, the principal can o er his agent a offer contract that promises a percentage of the bargaining result, and a bonus payment result (or penalty) if bargaining fails. Conventional wisdom of contract theory seems to suggest that the share should be as great as possible to provide proper incentives for a risk-neutral agent, while the bonus should be small or even negative. Drawing on the symmetric Nash bargaining solution, this paper argues that the optimal share is rather small, whereas the optimal bonus is rather large.

Suggested Citation

  • Roland Kirstein, 2009. "Optimal Delegation in Nash Bargaining," FEMM Working Papers 09001, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
  • Handle: RePEc:mag:wpaper:09001
    as

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    File URL: http://www.ww.uni-magdeburg.de/fwwdeka/femm/a2009_Dateien/2009_01.pdf
    File Function: First version, 2009
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    References listed on IDEAS

    as
    1. Roland Kirstein & Neil Rickman, 2004. ""Third Party Contingency" Contracts in Settlement and Litigation," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 160(4), pages 555-575, December.
    2. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    3. Steven D. Levitt & Chad Syverson, 2008. "Market Distortions When Agents Are Better Informed: The Value of Information in Real Estate Transactions," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 599-611, November.
    4. Kirstein, Roland & Gerhard, Hans, 2005. "The "Rainmaker's Dilemma": Bad Debt Loss Insurance in Settlement and Litigation," CSLE Discussion Paper Series 2005-02, Saarland University, CSLE - Center for the Study of Law and Economics.
    5. Hongbin Cai & Walter Cont, 2004. "Agency Problems and Commitment in Delegated Bargaining," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(4), pages 703-729, December.
    6. Ken Binmore & Avner Shared & John Sutton, 1989. "An Outside Option Experiment," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 753-770.
    7. Ellie G. Harris, 1990. "Antitakeover Measures, Golden Parachutes, and Target Firm Shareholder Welfare," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 614-625, Winter.
    8. Mathias Dewatripont, 1988. "Commitment Through Renegotiation-Proof Contracts with Third Parties," Review of Economic Studies, Oxford University Press, vol. 55(3), pages 377-390.
    9. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
    10. Bester, Helmut & Sakovics, Jozsef, 2001. "Delegated bargaining and renegotiation," Journal of Economic Behavior & Organization, Elsevier, vol. 45(4), pages 459-473, August.
    11. Michael L. Katz, 1991. "Game-Playing Agents: Unobservable Contracts as Precommitments," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 307-328, Autumn.
    12. Roland Kirstein, 2000. "Risk Neutrality and Strategic Insurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 25(2), pages 251-261, April.
    13. Jones, Stephen R. G., 1989. "Have your lawyer call my lawyer : Bilateral delegation in bargaining situations," Journal of Economic Behavior & Organization, Elsevier, vol. 11(2), pages 159-174, March.
    14. Burtraw, Dallas, 1992. "Strategic delegation in bargaining," Economics Letters, Elsevier, vol. 38(2), pages 181-185, February.
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    Cited by:

    1. Roland Kirstein & Matthias Peiss, 2013. "Quantitative Machtkonzepte in der Ökonomik," FEMM Working Papers 130004, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.

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    More about this item

    Keywords

    Endogenous threat points; marginal valuation; strategic moves;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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