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Costly bargaining and renegotiation

  • Anderlini, L.
  • Felli, L.

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.

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Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 9910.

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Date of creation: 01 Jan 1999
Date of revision:
Handle: RePEc:stn:sotoec:9910
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  1. Abrea Dilip & Pearce David & Stacchetti Ennio, 1993. "Renegotiation and Symmetry in Repeated Games," Journal of Economic Theory, Elsevier, vol. 60(2), pages 217-240, August.
  2. Luca Anderlini & Leonardo Felli, . "Costly Coasian Contracts," Penn CARESS Working Papers c5b2efc4326ca8bb8162440d6, Penn Economics Department.
  3. Farrell, Joseph & Maskin, Eric, 1987. "Renegotiation in Repeated Games," Department of Economics, Working Paper Series qt9wv3h5jb, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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  8. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
  9. Rubinstein, Ariel, 1995. "On the Interpretation of Decision Problems with Imperfect Recall," Mathematical Social Sciences, Elsevier, vol. 30(3), pages 324-324, December.
  10. Fershtman Chaim & Seidmann Daniel J., 1993. "Deadline Effects and Inefficient Delay in Bargaining with Endogenous Commitment," Journal of Economic Theory, Elsevier, vol. 60(2), pages 306-321, August.
  11. Fudenberg, Drew & Tirole, Jean, 1991. "Perfect Bayesian equilibrium and sequential equilibrium," Journal of Economic Theory, Elsevier, vol. 53(2), pages 236-260, April.
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  13. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  14. Benoit, Jean-Pierre & Krishna, Vijay, 1991. "Renegotiation in Finitely Repeated Games," Working Papers 91-34, C.V. Starr Center for Applied Economics, New York University.
  15. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, number 9780521576475, October.
  16. Raquel Fernandez & Jacob Glazer, 1989. "Striking for a Bargain Between Two Completely Informed Agents," NBER Working Papers 3108, National Bureau of Economic Research, Inc.
  17. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
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  19. Evans, Robert & Maskin, Eric, 1989. "Efficient renegotiation--proof equilibria in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 361-369, December.
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