Negotiation Protocol in Two-Issue Bargaining with Contributions

Abstract

I study the role of the negotiation protocol in two-issues bargaining between two players, in which the pie only exists if both players contribute to its creation. The issues are the fraction of the pie, and the second is the pie itself, modeled as which project to choose. I examine three protocols–simultaneous, sequential, and incomplete bargaining–and show that the protocol does not play any role if the contribution cost of one player is high enough. I provide conditions under which the protocol plays a role and describe the equilibrium. I apply the model to discuss the allocation of control rights in early projects financed by venture capital.

Keywords: Multi-issue bargaining, negotiation protocol, investment.

JEL Classification: C72, C78, D74