Journal Article

Alternating-Offer Bargaining with Two-Sided Incomplete Information

Joel Watson

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 65, issue 3, pages 573-594
Published in print July 1998 | ISSN: 0034-6527
Published online July 1998 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00058
Alternating-Offer Bargaining with Two-Sided Incomplete Information

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I study alternating-offer bargaining games with two-sided incomplete information about the players' discount rates. For both perfect Bayesian equilibrium and a rationalizability-style notion, I characterize the set of expected payoffs which may arise in the game. I also construct bounds on agreements that may be made. The set of expected payoffs is easy to compute and incorporate into applied models. My main result is a full characterization of the set of perfect Bayesian equilibrium payoffs for games in which the distribution over the players' discount rates is of wide support, yet is in a weak sense close to a point mass distribution. I prove a lopsided convergence result: each player cannot gain from a slight chance that she is a strong type, but the player can suffer greatly if there is a slight chance that she is a weak type.

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Subjects: Economics

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