Information, fairness, and efficiency in bargaining

Summary

Economic theory assumes people strive for efficient agreements that benefit all consenting parties. The frequency of mutually destructive conflicts such as strikes, litigation, and military conflict, therefore, poses an important challenge to the field.

Among economists, game theorists have devoted the most attention to inefficiency and have proposed a number of theories to explain why inefficient agreements occur. Most of these revolve around a common theme: Inefficiencies arise because parties possess incomplete information. Bargainers often lack information about how much other parties value an agreement (Babcock, 1991; Hayes, 1984; Tracy, 1987), about the personal characteristics (e.g., impatience) of the other party (Rubinstein, 1985), or the likely consequence of nonsettlement as determined by the ruling of an arbitrator or the existence of other parties willing to make a deal (Priest & Klein, 1984).

Incomplete information impedes settlement for two reasons. First, when bargainers lack information about the other party, they may use the bargaining process to find out the missing information. For example, a union might call a strike to assess management's ability to withstand a strike. Second, when bargainers lack information about the other party's tastes or opportunities, they may overestimate the other party's willingness to make concessions. For example, the seller of a used car may hold out for an unrealistically high price in the erroneous belief that the buyer really likes the car or is impatient to buy it.