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Costly bargaining and renegotiation

Anderlini, Luca and Felli, Leonardo (1998) Costly bargaining and renegotiation. TE/98/361. Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science, London, UK.

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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.

Item Type: Monograph (Discussion Paper)
Official URL: http://sticerd.lse.ac.uk/
Additional Information: © 1998 by Luca Anderlini and Leonardo Felli.
Library of Congress subject classification: H Social Sciences > HF Commerce
H Social Sciences > HG Finance
Journal of Economic Literature Classification System: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D80 - General
C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C70 - General
D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior; Transaction Costs; Property Rights
D - Microeconomics > D6 - Welfare Economics > D60 - General
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Departments > Economics
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: TE/98/361
Date Deposited: 28 Feb 2008
URL: http://eprints.lse.ac.uk/3592/

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