Optimal Stalling When Bargaining
35 Pages Posted: 9 Sep 2008 Last revised: 18 Mar 2014
Date Written: May 1, 2009
This paper analyzes an alternating offer model of bargaining over the sale of an asset in a market, such as that for housing, in which another agent may come and compete for the right to strike a deal. The analysis allows the buyer and seller to have possibly differing views as to how likely such competition is. Hence the buyer and seller disagree about their respective bargaining powers. These views adjust to market realizations as the parties learn. It is shown that there exists a unique Subgame Perfect Equilibrium which can be explicitly constructed: hence, conditional on market conditions, equilibrium prices and optimal stall lengths (that is delay) can be found. Bargaining delay can only occur if there is optimism (not pessimism) and only if the parties are open to learning as time elapses. This delay can occur even for very small levels of optimism and the delay can be for economically significant periods.
Keywords: Optimism, bargaining delay, asset sales, house sales, bargaining power
JEL Classification: D83, C78
Suggested Citation: Suggested Citation