Bargaining, reputation, and equilibrium selection in repeated games with contracts

Dilip Abreu, David Pearce

    Research output: Contribution to journalArticle

    Abstract

    Consider a two-person intertemporal bargaining problem in which players choose actions and offers each period, and collect payoffs (as a function of that period's actions) while bargaining proceeds. This can alternatively be viewed as an infinitely repeated game wherein players can offer one another enforceable contracts that govern play for the rest of the game. Theory is silent with regard to how the surplus is likely to be split, because a folk theorem applies. Perturbing such a game with a rich set of behavioral types for each player yields a specific asymptotic prediction for how the surplus will be divided, as the perturbation probabilities approach zero. Behavioral types may follow nonstationary strategies and respond to the opponent's play. In equilibrium, rational players initially choose a behavioral type to imitate and a war of attrition ensues. How much should a player try to get and how should she behave while waiting for the resolution of bargaining? In both respects she should build her strategy around the advice given by the "Nash bargaining with threats" (NBWT) theory developed for two-stage games. In any perfect Bayesian equilibrium, she can guarantee herself virtually her NBWT payoff by imitating a behavioral type with the following simple strategy: in every period, ask for (and accept nothing less than) that player's NBWT share and, while waiting for the other side to concede, take the action Nash recommends as a threat in his two-stage game. The results suggest that there are forces at work in some dynamic games that favor certain payoffs over all others. This is in stark contrast to the classic folk theorems, to the further folk theorems established for repeated games with two-sided reputational perturbations, and to the permissive results obtained in the literature on bargaining with payoffs as you go.

    Original languageEnglish (US)
    Pages (from-to)653-710
    Number of pages58
    JournalEconometrica
    Volume75
    Issue number3
    DOIs
    StatePublished - May 2007

    Fingerprint

    Equilibrium Selection
    Repeated Games
    Bargaining
    reputation
    threat
    Folk Theorem
    Game
    Choose
    guarantee
    Perturbation
    Attrition
    Dynamic Games
    human being
    Reputation
    Equilibrium selection
    Repeated games
    Threat
    Person
    Nash bargaining
    Folk theorem

    Keywords

    • Bargaining
    • Behavioral types
    • Equilibrium selection
    • Repeated games
    • Reputation
    • War of attrition

    ASJC Scopus subject areas

    • Mathematics (miscellaneous)
    • Statistics and Probability
    • Economics and Econometrics
    • Social Sciences (miscellaneous)

    Cite this

    Bargaining, reputation, and equilibrium selection in repeated games with contracts. / Abreu, Dilip; Pearce, David.

    In: Econometrica, Vol. 75, No. 3, 05.2007, p. 653-710.

    Research output: Contribution to journalArticle

    Abreu, Dilip ; Pearce, David. / Bargaining, reputation, and equilibrium selection in repeated games with contracts. In: Econometrica. 2007 ; Vol. 75, No. 3. pp. 653-710.
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