Negotiating With Frictions
CERETH Economics Working Paper Series 19/309
33 Pages Posted: 27 Jan 2019
Date Written: January 8, 2019
We consider bilateral non-cooperative bargaining on the division of a surplus. Compared to the canonical bargaining game in the tradition of Rubinstein, we introduce additional sources of friction into the bargaining process: Implementation of an agreement and consumption of the surplus can only begin at discrete points in time, such as the first day of a month, quarter, or year. Bargaining rounds are of non-trivial length, so that counter-others may be made without triggering costly delay. Communication between players is noisy: When players make others, they are uncertain about the time it takes for the other to arrive. We analyze delays and payoffs in the unique stationary equilibrium of the game. Frictions tend to make the bargaining process less efficient, but lead to a fairer surplus allocation. We establish conditions under which the equilibrium outcome converges to that in a canonical bargaining model as frictions become small.
Keywords: Bargaining, Discount Factor, Timing, Subgame, Perfect Equilibrium, Equilibrium Delay
JEL Classification: C72, C78
Suggested Citation: Suggested Citation