Uncertainty and Delay in Bargaining

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This project is important because of its methodological contribution to game theory and its substantive contributions to our understanding of industrial organization, wage negotiations and bargaining with imperfect information. Although he is just beginning his career, the investigator has already made significant contributions to economic applications of game theory. The methodological contribution comes from extending the concept of strategic stability beyond the current range of economic applications. This is important because there are multiple outcomes intrinsic in the strategic behavior of economic agents and the concept of strategic stability permits researchers to rigorously identify specific sensible outcomes and in this way make testable predictions. The project develops computationally tractable algorithms for determining strategic stability. Substantively, the project examines entry deterrence, i. e., firms within an industry deter potential competitors by signalling tough competition against any future entrants. Preliminary results obtained by the investigator suggest the solutions of current models of entry deterrence depend crucially on a minor assumption and, therefore, are not strategically stable. The investigator also proved that a unique stable solution exists for entry deterrence. The contribution of this project comes from generalizing these results and determining the specific characteristics of the stable solution. The project also studies the use of strikes in wage negotiations. Recent work demonstrated that wage negotiations between two rational players, management and union, may involve strikes, even though a strike is costly for both parties. The contribution of this project comes from explaining why wage negotiations often involve a take-it-or-leave-it offer by the management, which frequently leads to a costly shutdown of the firm.