We model costly preparations in negotiations and study their effect on agreements in a bilateral bargaining game. In our model, players bargain over a unit pie, where each player needs to pay a fixed cost in the beginning of every period t, if he wants to stay in the game in period t+1 in case a deal has not been reached by the end of t. Whether a player has paid this cost (i.e., prepared for negotiations in t+1) is his private information. If only player i stops paying, then player j receives the entire pie. We characterize a “war of attrition” equilibrium, which is a symmetric equilibrium. We do not know whether the game has other symmetric equilibria, but we show that if such an equilibrium exists, its payoff converges to zero as the frictions (discounting and preparation cost) vanish. Efficiency can be obtained by asymmetric play. Specifically, with asymmetric strategies every Pareto-efficient payoff vector can be approximated in equilibrium, provided that the cost of preparations is sufficiently small and that the discount factor is sufficiently close to one.
Bibliographical noteFunding Information:
E. Karagözoğlu thanks TÜBTAK (The Scientific and Technological Research Council of Turkey) for the post‐doctoral research fellowship, and the Department of Economics, MIT, for their hospitality. The authors thank four anonymous reviewers for very useful comments, which significantly improved the paper. The authors also thank the following for helpful comments and fruitful discussions: Daron Acemoglu, Alp Atakan, Gary Bolton, Geoffroy De Clippel, Mehmet Ekmekci, Tore Ellingsen, Hülya Eraslan, Jack Fanning, Toomas Hinnosaar, Janos Flesch, Bart Lipman, Moti Michaeli, Wojciech Olszewski, Juan Ortner, Erkut Ozbay, Andres Perea, Arno Riedl, Roberto Serrano, Jim Schummer, Dries Vermeulen, Dan Vincent, Huseyin Yildirim, Muhamet Yildiz, and seminar participants at Boston University, Brown University, Koc University, Maastricht University, MIT, Penn State, University of California Santa Barbara, University of Maryland, University of Pittsburgh, and Western University. Usual disclaimers apply.
© The editors of The Scandinavian Journal of Economics 2020.
- preparation costs
- private information
- war of attrition
ASJC Scopus subject areas
- Economics and Econometrics