Reputational Bargaining with Ultimatum Opportunities

70 Pages Posted: 29 Oct 2018 Last revised: 10 Apr 2021

See all articles by Mehmet Ekmekci

Mehmet Ekmekci

Boston College - Department of Economics

Hanzhe Zhang

Department of Economics, Michigan State University

Date Written: April 9, 2021

Abstract

We study two-sided reputational bargaining with opportunities to issue an ultimatum---threats to force dispute resolution. Each player is either a justified type, who never concedes and issues an ultimatum whenever an opportunity arrives, or an unjustified type, who can concede, wait, or bluff with an ultimatum. In equilibrium, the presence of ultimatum opportunities can harm or benefit a player by decelerating or accelerating reputation building. When only one player can issue an ultimatum, equilibrium play is unique. The hazard rate of dispute resolution is discontinuous and piecewise monotonic in time. As the probabilities of being justified vanish, agreement is immediate and efficient, and if the set of justifiable demands is rich, payoffs modify Abreu and Gul (2000), with the discount rate replaced by the ultimatum opportunity arrival rate if the former is smaller. When both players' ultimatum opportunities arrive sufficiently fast, there may exist multiple equilibria in which their reputations do not build up and negotiation lasts forever.

Keywords: reputational bargaining, ultimatum, arbitration

JEL Classification: C78

Suggested Citation

Ekmekci, Mehmet and Zhang, Hanzhe, Reputational Bargaining with Ultimatum Opportunities (April 9, 2021). Available at SSRN: https://ssrn.com/abstract=3262107 or http://dx.doi.org/10.2139/ssrn.3262107

Mehmet Ekmekci

Boston College - Department of Economics ( email )

United States

Hanzhe Zhang (Contact Author)

Department of Economics, Michigan State University ( email )

486 West Circle Drive
East Lansing, MI 48824
United States

HOME PAGE: http://hanzhezhang.github.io/

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