On the Nash bargaining solution with noise

Suppose two parties have to share a surplus of random size. Each of the two can either commit to a demand prior to the realization of the surplus – as in the Nash demand game – or remain silent and wait until the surplus was observed. Adding the strategy to wait results in two strict equilibria, in...

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Bibliographic Details
Published in:European economic review 2004-06, Vol.48 (3), p.697-713
Main Authors: Güth, Werner, Ritzberger, Klaus, van Damme, Eric
Format: Article
Language:English
Subjects:
Bargaining
Demand
Economic models
Economic theory
Economics
Endogenous timing
Equilibrium theory
Game theory
Studies
Time
Uncertainty
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Summary:Suppose two parties have to share a surplus of random size. Each of the two can either commit to a demand prior to the realization of the surplus – as in the Nash demand game – or remain silent and wait until the surplus was observed. Adding the strategy to wait results in two strict equilibria, in each of which one player takes almost the whole surplus, provided uncertainty is small. If commitments concern only who makes the first offer, the more balanced Nash bargaining solution is approximately restored. In all cases, commitment occurs in equilibrium – despite the risk of breakdown of negotiations.
ISSN:0014-2921
1873-572X
DOI:10.1016/S0014-2921(02)00316-1