Costly Preparations in Bargaining*

Emin Karagözoğlu; Shiran Rachmilevitch

doi:10.1111/sjoe.12409

Costly Preparations in Bargaining*

Emin Karagözoğlu, Shiran Rachmilevitch

Department of Economics

Research output: Contribution to journal › Article › peer-review

Abstract

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.

Original language	English
Pages (from-to)	532-557
Number of pages	26
Journal	Scandinavian Journal of Economics
Volume	123
Issue number	2
DOIs	https://doi.org/10.1111/sjoe.12409
State	Published - Apr 2021

Bibliographical note

Funding 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.

Publisher Copyright:
© The editors of The Scandinavian Journal of Economics 2020.

Keywords

Bargaining
preparation costs
private information
war of attrition

ASJC Scopus subject areas

Economics and Econometrics

Access to Document

10.1111/sjoe.12409

Cite this

@article{babb83ff493541d6880358ad4c31dc69,

title = "Costly Preparations in Bargaining*",

abstract = "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.",

keywords = "Bargaining, preparation costs, private information, war of attrition",

author = "Emin Karag{\"o}zoğlu and Shiran Rachmilevitch",

note = "Funding Information: E. Karag{\"o}zoğlu thanks T{\"U}BTAK (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, H{\"u}lya 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. Publisher Copyright: {\textcopyright} The editors of The Scandinavian Journal of Economics 2020.",

year = "2021",

month = apr,

doi = "10.1111/sjoe.12409",

language = "English",

volume = "123",

pages = "532--557",

journal = "Scandinavian Journal of Economics",

issn = "0347-0520",

publisher = "Wiley-Blackwell Publishing Ltd",

number = "2",

}

TY - JOUR

T1 - Costly Preparations in Bargaining*

AU - Karagözoğlu, Emin

AU - Rachmilevitch, Shiran

N1 - Funding 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. Publisher Copyright: © The editors of The Scandinavian Journal of Economics 2020.

PY - 2021/4

Y1 - 2021/4

N2 - 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.

AB - 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.

KW - Bargaining

KW - preparation costs

KW - private information

KW - war of attrition

UR - http://www.scopus.com/inward/record.url?scp=85096698421&partnerID=8YFLogxK

U2 - 10.1111/sjoe.12409

DO - 10.1111/sjoe.12409

M3 - Article

AN - SCOPUS:85096698421

SN - 0347-0520

VL - 123

SP - 532

EP - 557

JO - Scandinavian Journal of Economics

JF - Scandinavian Journal of Economics

IS - 2

ER -

Costly Preparations in Bargaining*

Abstract

Bibliographical note

Keywords

ASJC Scopus subject areas

Access to Document

Other files and links

Fingerprint

Cite this