5 - A sequential strategic theory of bargaining

Summary

Introduction

The purpose of this survey is to review the development of the sequential strategic approach to the bargaining problem, and to explain why I believe that this theory may provide a foundation for further developments in other central areas of economic theory.

John Nash started his 1950 paper by defining the bargaining situation:

A two person bargaining situation involves two individuals who have the opportunity to collaborate for mutual benefit in more than one way.... The two individuals are highly rational,... each can accurately compare his desire for various things . . . they are equal in bargaining skill.

Given a bargaining situation, we look for a theoretical prediction of what agreement, if any, will be reached by the two parties.

I began with this clarification because of the existing confusion in some of the literature among the above problem and the following (nonexclusive) ethical questions: “What is a just agreement?” “What is a reasonable outcome for an arbitrator’s decision?” and “What agreement is optimal for society as a whole?” These questions differ from the current one mainly in that they allow derivation of an answer from a social welfare optimization. An a priori assumption that a solution to the bargaining problem satisfies collective rationality properties seems inappropriate.