Collaborative Research: Reputational Equilibrium Refinements of Bargaining Games with Asymmetric Information

New York University, New York NY

Investigators

Abstract

Bargaining between two agents is one of the most central economic problems, and it often occurs under asymmetric information: one or more of the agents lack some relevant information about the opponent (how she weighs current versus future consumption, how much she values some commodity to be exchanged, what other options she might have, and so on). Despite the importance of this problem, it resists traditional economic analysis, and economists do not view the models currently available as offering adequate treatments of the subject. This proposal studies a number of bargaining situations when players have the possibility of building reputations for being "tough". We hope to show that in the case of one-sided asymmetric information about a player's patience, very modest assumptions suffice to produce strong predictions about behavior. Turning to one-sided asymmetric information about valuations, the goal is to allow for a rich variety of behavioral perturbations and still obtain strong conclusions. We hope that the results of this research will ultimately help in the study of two-sided asymmetric information: neither player is sure about how much the other values an object to be sold, for example. The literature offers virtually no guidance about what to expect in such situations and this proposal moves research toward areas considered impenetrable by generations of researchers. The broader impact of the proposal rests on the potential for the results to be applied to real-world bargaining situations. The economic and political landscapes are littered with important examples, from collective bargaining between union and firm to negotiations between a country and its neighbor regarding timber, pipelines, tariffs, or defense accords. Understanding the basic underlying principles would improve our ability to predict outcomes, and to design policies and institutions to promote more favorable results.