Aspirational Bargaining

U of Michigan Economics Working Paper No. 2002-01

32 Pages Posted: 29 Jan 2002

See all articles by Lones Smith

Lones Smith

University of Wisconsin at Madison - Department of Economics

Ennio Stacchetti

Leonard N. Stern School of Business - Department of Economics

Date Written: January 23, 2002

Abstract

This paper offers a noncooperative behaviourally-founded solution of the complete information bargaining problem where two impatient individuals wish to divide a unit pie. We formulate the game in continuous time, with unrestricted timing and content of offers. Reprising experimental work from 1960, we introduce and explore aspirational equilibrium -- a Markovian refinement of subgame perfection where behaviour is governed by aspiration values (expected payoffs).

The analysis is tractable, and generates many intuitive aspects of bargaining absent from the standard temporal monopoly paradigm: wars of attrition explains delay; serious offers are concessions; offers may be turned down, strictly disappointing the proposers, or accepted, strictly helping the proposer. In particular, an endogenous 'proposee' advantage arises, as opposed to the hard-wired proposer standard advantage.

We find that discounted aspiration values form a martingale, and thereby compute bounds on the expected bargaining duration from observed offers. We also deduce some simple implications about consecutive offers, and relate delay times, offers, and acceptance rates. Finally, we draw into question a traditional comparative static: Ceteris paribus, more impatient players can expect more of the pie.

Keywords: bargaining, subgame perfection, refinement, aspirations, temporal monopoly, martingale

JEL Classification: C78

Suggested Citation

Smith, Lones and Stacchetti, Ennio S., Aspirational Bargaining (January 23, 2002). U of Michigan Economics Working Paper No. 2002-01, Available at SSRN: https://ssrn.com/abstract=297979 or http://dx.doi.org/10.2139/ssrn.297979

Lones Smith (Contact Author)

University of Wisconsin at Madison - Department of Economics ( email )

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Ennio S. Stacchetti

Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

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