Evolutionary Bargaining with Cooperative Investments

28 Pages Posted: 20 Nov 2002

See all articles by Herbert Dawid

Herbert Dawid

Bielefeld University - Department of Business Administration and Economics; Center for Mathematical Economics

W. Bentley MacLeod

Columbia University - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Date Written: January 2002

Abstract

This paper explores the set of stochastically stable equilibria in a model in which individuals first decide to make a high or low investment, and then are matched to play a Nash demand game. If an agreement is not reached, then they are re-matched in the next period, and obtain a payoff discounted by d. We identify a condition under which stochastically stable bargaining conventions exist and find, that the stochastically stable division rule is independent of the long run investment strategy. In these conventions the potential to trade in subsequent periods always has an effect on the bargain, and the market acts more like a threat point, than an outside option. If investments are substitutes stochastically stable bargaining conventions imply larger investment incentives than the Nash bargaining solution whereas the opposite is true if investments are complements. Finally, if it is not efficient for trade to occur as a result of the outside option, and investments are complements, then no bargaining convention can develop, and investment levels are typically inefficient.

Suggested Citation

Dawid, Herbert and MacLeod, William Bentley, Evolutionary Bargaining with Cooperative Investments (January 2002). USC CLEO Research Paper No. C02-19. Available at SSRN: https://ssrn.com/abstract=338282 or http://dx.doi.org/10.2139/ssrn.338282

Herbert Dawid

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany
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Center for Mathematical Economics ( email )

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William Bentley MacLeod (Contact Author)

Columbia University - Department of Economics ( email )

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United States

National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics ( email )

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