Complexity and Efficiency in Repeated Games with Negotiation

Abstract

This paper considers the "negotiation game" (Busch and Wen, 1995) which combines the features of two-person alternating offers bargaining and repeated games. Despite the forces of bargaining, the negotiation game in general admits a large number of equilibria some of which involve delay in agreement and inefficiency. In order to isolate equilibria in this game, we explicitly consider the complexity of implementing a strategy, introduced in the literature on repeated games played by automata. It turns out that when the players have a preference for less complex strategies (even at the margin) only efficient equilibria survive. Thus, complexity and bargaining in tandem may offer an explanation for co-operation in repeated gamesNegotiation Game, Repeated Game, Bargaining, Complexity, Bounded Rationality, Automaton