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A Theory of Bargaining Deadlock

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  • Ilwoo Hwang

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Abstract

I study a dynamic one-sided-offer bargaining model between a seller and a buyer under incomplete information. The seller knows the quality of his product while the buyer does not. During bargaining, the seller randomly receives an outside option, the value of which depends on the hidden quality. If the outside option is sufficiently important, there is an equilibrium in which the uninformed buyer fails to learn the quality and continues to make the same randomized offer throughout the bargaining process. As a result, the equilibrium behavior produces an outcome path that resembles the outcome of a bargaining deadlock and its resolution. The equilibrium with deadlock has inefficient outcomes such as a delay in reaching an agreement and a breakdown in negotiations. Bargaining inefficiencies do not vanish even with frequent offers, and they may exist when there is no static adverse selection problem. Under stronger parametric assumptions, the equilibrium with deadlock is unique under a monotonicity criterion, and all equilibria exhibit inefficient outcomes.

Suggested Citation

  • Ilwoo Hwang, 2013. "A Theory of Bargaining Deadlock," PIER Working Paper Archive 13-050, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  • Handle: RePEc:pen:papers:13-050
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    File URL: https://economics.sas.upenn.edu/sites/default/files/filevault/13-050.pdf
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    References listed on IDEAS

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    1. Fuchs, William & Öry, Aniko & Skrzypacz, Andrzej, 2016. "Transparency and distressed sales under asymmetric information," Theoretical Economics, Econometric Society, vol. 11(3), September.
    2. Olivier Compte & Philippe Jehiel, 2002. "On the Role of Outside Options in Bargaining with Obstinate Parties," Econometrica, Econometric Society, vol. 70(4), pages 1477-1517, July.
    3. Robert Evans, 1989. "Sequential Bargaining with Correlated Values," Review of Economic Studies, Oxford University Press, vol. 56(4), pages 499-510.
    4. In-Koo Cho, 1990. "Uncertainty and Delay in Bargaining," Review of Economic Studies, Oxford University Press, vol. 57(4), pages 575-595.
    5. William Fuchs & Andrzej Skrzypacz, 2010. "Bargaining with Arrival of New Traders," American Economic Review, American Economic Association, vol. 100(3), pages 802-836, June.
    6. Muhamet Yildiz, 2004. "Waiting to Persuade," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 223-248.
    7. Dilip Abreu & Faruk Gul, 2000. "Bargaining and Reputation," Econometrica, Econometric Society, vol. 68(1), pages 85-118, January.
    8. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, March.
    9. Ilwoo Hwang & Fei Li, 2013. "Coasian Bargaining with An Arriving Outside Option," PIER Working Paper Archive 13-047, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    10. Jihong Lee & Qingmin Liu, 2013. "Gambling Reputation: Repeated Bargaining With Outside Options," Econometrica, Econometric Society, vol. 81(4), pages 1601-1672, July.
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    Cited by:

    1. Ilwoo Hwang & Fei Li, 2013. "Coasian Bargaining with An Arriving Outside Option," PIER Working Paper Archive 13-047, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

    More about this item

    Keywords

    bargaining game; asymmetric information; bargaining deadlock; delay; failure of learning; Coase conjecture;

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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