Bargaining Between Collaborators of a Stochastic Project

38 Pages Posted: 24 Sep 2020

See all articles by Z. Eddie Ning

Z. Eddie Ning

Cheung Kong Graduate School of Business

Date Written: January 1, 2020

Abstract

Some projects require collaboration between two firms. The expected return from such alliance can change over time due to evolving market conditions or arrival of new information. In such cases, when do firms agree to collaborate, and how do they split the profit? To address these questions, the paper studies a continuous-time model of bargaining with a stochastic surplus. The paper shows that the existence of outside options creates a hold-up problem that leads to inefficiencies. Firms act too impatiently, causing both the probability of collaborating and its timing to be sub- optimal. Increasing the frequency of counteroffers in bargaining, which has the effect of balancing their bargaining power, improves efficiency by reducing the hold-up. More importantly, the paper finds that a more balanced bargaining power can lead to Pareto improvement. The model illustrates the effect of outside options and bargaining power on firms’ decision to collaborate, and shows how potential collaborators should (not) bargain.

Keywords: collaboration, optimal stopping, bargaining, alliance, joint decision-making, continuous-time game

Suggested Citation

Ning, Z. Eddie, Bargaining Between Collaborators of a Stochastic Project (January 1, 2020). Available at SSRN: https://ssrn.com/abstract=3679737 or http://dx.doi.org/10.2139/ssrn.3679737

Z. Eddie Ning (Contact Author)

Cheung Kong Graduate School of Business ( email )

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