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Costly bargaining and renegotiation

By Luca Anderlini and Leonardo Felli

Abstract

We identify the inefficiencies that arise when negotiation between two parties takes place in the presence of transaction costs. First, for some values of these costs it is efficient to reach an agreement but the unique equilibrium outcome is one in which agreement is never reached. Secondly, even when there are equilibria in which an agreement is reached, we find that the model always has an equilibrium in which agreement is never reached, as well as equilibria in which agreement is delayed for an arbitrary length of time. Finally, the only way in which the parties can reach an agreement in equilibrium is by using inefficient punishments for (some of) the opponent’s deviations. We argue that this implies that, when the parties are given the opportunity to renegotiate out of these inefficiencies, the only equilibrium outcome which survives is the one in which agreement is never reached, regardless of the value of the transaction costs

Topics: HF Commerce, HG Finance
Publisher: Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science
Year: 1998
OAI identifier: oai:eprints.lse.ac.uk:3592
Provided by: LSE Research Online

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