Chapter 5 - Infinite-horizon models of bargaining with one-sided incomplete information

Summary

Introduction

Bargaining occurs whenever two or more parties can share a surplus if an agreement can be reached on how the surplus should be shared, with a status-quo point that will prevail in the event of disagreement. Until recently, bargaining has been analyzed using the cooperative approach, which typically consists of specifying a set of axioms that the bargaining outcome should satisfy, and then proving that a solution satisfying these axioms exists and is unique. More recently, a second approach has emerged, which relies on the theory of noncooperative games. The typical paper of this type specifies a particular extensive form for the bargaining process, and solves for the noncooperative equilibria. Thus, the noncooperative approach replaces the axioms of the cooperative approach with the need to specify a particular extensive form.

Although this chapter is based on the noncooperative approach, which we believe has considerable power, we should point out that the reliance of the noncooperative approach on particular extensive forms poses two problems. First, because the results depend on the extensive form, one needs to argue that the chosen specification is reasonable – that it is a good approximation to the extensive forms actually played. Second, even if one particular extensive form were used in almost all bargaining, the analysis is incomplete because it has not, at least to-date, begun to address the question of why that extensive form is used.