Bargaining Theory

This thesis is devoted to the study of bargaining using the methods of non-cooperative game theory. In Part I (chapters 1 and 2) we examine the role of commitment in bilateral bargaining. Two different notions of commitment in bargaining are explored in two different non-cooperative infinite-time horizon sequential games with complete and perfect information. In Part II (chapters 3 and 4) we examine the role of outside options in bilateral bargaining. Two models are presented, each model is a non cooperative infinite-time horizon sequential game with complete information. The two models differ in their approach to modelling the interlacing of the search and bargaining processes. In the final part of this thesis, Part III (chapter 5)z we present a a of decentralised market, based on the idea that the agents of the market search for partners with whom to trade and when a buyer and a seller meet they initiate a sequential bargaining process over the terms of trade

Search and bargaining in large markets with homogeneous traders

We study pair-wise decentralized trade in dynamic markets with homogeneous, non-atomic, buyers and sellers that wish to exchange one unit. Pairs of traders are randomly matched and bargaining a price under rules that offer the freedom to quit the match at any time. Market equilbria, prices and trades over time, are characterized. The asymptotic behavior of prices and trades as frictions (search costs and impatience) vanish, and the conditions for (non) convergence to walrasian prices are explored. As a side product of independent interest, we present a self-contained theory of non-cooperative bargaining with two-sided, time-varying, outside options.Bargaining, Market Equilibrium, Outside Options

Entrepreneurship, outside options and constrained

The literature on search frictions has often adopted the assumption of free entry. In this paper we forgo of this restriction by proposing a more realistic framework in which individuals are constantly making the decision whether or not to open a firm. Namely, firms are created through endogenous choices and business-owners and workers are drawn from the same pool. We show that in this framework, the Nash bargaining parameter is crucial for internal dynamics. In particular, workers and business owners share the same outside-options. As a result, the wage is no longer unambiguously positively related to the value of unemployment. The constrained efficient solution to this model takes the same form as the standard search model implying the same form for the Hosios condition. However, at this efficient solution changes in the rate of unemployment are either exacerbated or muted conditional on the value of the match elasticity parameter

Investments and the Holdup Problem in a Matching Market

This paper studies investment incentives in the steady state of a dynamic bilateral matching market. Because of search frictions, both parties in a match are partially locked–in when they bargain over the joint surplus from their sunk investments. The associated holdup problem depends on market conditions and is more important for the long side of the market. In the case of investments in homogenous capital only the agents on the short side acquire ownership of capital. There is always underinvestment on both sides of the market. But when market frictions become negligible, the equilibrium investment levels tend towards the ?rst–best

The provision of quality in a bilateral search market

We accomplish two goals. First, we provide a non-cooperative foundation for the use of the Nash bargaining solution in search markets. This finding should help to close the rift between the search and the matching-and-bargaining literature. Second, we establish that the diversity of quality offered (at an increasing price-quality ratio) in a decentralized market is an equilibrium phenomenon - even in the limit as search frictions disappear.quality dispersion, Nash Program, bilateral search

The provision of quality in a bilateral search market

We accomplish two goals. First, we provide a non-cooperative foundation for the use of the Nash bargaining solution in search markets. This finding should help to close the rift between the search and the matching-and-bargaining literature. Second, we establish that the diversity of quality offered (at an increasing price-quality ratio) in a decentralized market is an equilibrium phenomenon -even in the limit as search frictions disappear.quality dispersion, Nash Program, bilateral search.

A Game Theoretical Model of Land Contract Choice

In most of the land tenancy literature the type of contract is exogenous. Also even though these contracts vary a lot among farms, between regions and over time, the theoretical literature has not always acknowledged this idiosyncrasy. Building on the strategic bargaining theory initiated by Rubinstein, this model not only makes the type of contract endogenous, but also provides the surplus sharing rules and the conditions giving rise to each type of contract, showing how the type and terms of the contract are tailored to fit the characteristics of the parties and their economic environment. Pairwise bargaining is embedded into a market context by putting “competitive pressure” on the players through the opportunity they have to break up bargaining and look for alternative partners. Because of this threat of opting out, the outcome of the bargaining process depends not only on the characteristics of the players, but also on events outside their match and the information they have about them. The model departs from price-taking assumptions. Type and terms of the contract result from negotiation and are shaped by the “relative bargaining powers” of the players whose relevant components are identified in a precise way in the model.land tenancy, sharecropping, land contract choice, game theory

A Game Theoretical Model of Land Contract Choice

In most of the land tenancy literature the type of contract is exogenous. Also even though these contracts vary a lot among farms, between regions and over time, the theoretical literature has not always acknowledged this idiosyncrasy. Building on the strategic bargaining theory initiated by Rubinstein, this model not only makes the type of contract endogenous, but also provides the surplus sharing rules and the conditions giving rise to each type of contract, showing how the type and terms of the contract are tailored to fit the characteristics of the parties and their economic environment. Pairwise bargaining is embedded into a market context by putting “competitive pressure” on the players through the opportunity they have to break up bargaining and look for alternative partners. Because of this threat of opting out, the outcome of the bargaining process depends not only on the characteristics of the players, but also on events outside their match and the information they have about them. The model departs from price-taking assumptions. Type and terms of the contract result from negotiation and are shaped by the “relative bargaining powers” of the players whose relevant components are identified in a precise way in the model.land tenancy, contract choice, game theory

A note on the unemployment volatility puzzle : is credible wage bargaining the answer?

This paper shows that the ability of the credible wage bargaining model to match the observed unemployment volatility hinges on an unrealistic assumption about disagreement payoffs to the firm. Relaxing this assumption can lead to the substantial wage flexibility. As a consequence, the model is unable to capture the observed unemployment volatility

Bargaining and Reputation in Search Markets

In a two-sided search market agents are paired to bargain over a unit surplus. The matching market serves as an endogenous outside option for agents in a bargaining relationship. Behavioral agents are (strategically inflexible) commitment types that demand a constant portion of the unit surplus. The steady state frequency of behavioral types in the market is determined in equilibrium. We show, even if behavioral types are negligible, they substantially effect the terms of trade and efficiency. In an unbalanced market where the entering flow of one side is short, bargaining follows equilibrium play in a bargaining game with one-sided reputation, the terms of trade are determined by the commitment types on the short side, and commitment types improve efficiency. In a balanced market where the entering flows of the two sides are equal, bargaining follows equilibrium play in a bargaining game with two-sided reputation and commitment types cause inefficiency. An inefficient equilibrium with persistent delays and break-ups is constructed. The magnitude of inefficiency is determined by the inflexible demands of the commitment types and is independent of the fraction of the commitment types entering the market.Bargaining, Reputation, Search, Dynamic Matching, War-of-Attrition. JEL Classification Numbers: C78, D83