Reputation and Perspective in Bargaining

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Project Abstract Bargaining between two parties (a union and a firm, a buyer and a seller, or two governments, for example) is one of the most common economic occurrences, but economists are far from having a definitive understanding of how it works. This project involves two innovations in the way bargaining can be studied. The first is a model of bargaining that is more flexible than those analyzed in the past: it allows for a bargainer to engage in subtle `reputation-building` behavior, trying to convince her opponent that she is unlikely to make a concession in the near future. Technically, the `endogenous perturbations` that are introduced result in substantial predictions that have a plausible flavor: Bargaining typically involves long periods of inactivity, followed by concessions of noticeable size that are often greeted by a degree of reciprocal compromise. The second innovation recognizes that one difficulty in reaching agreement is that bargainers may genuinely differ in their perspectives on what a natural or fair agreement would be. While the first party understands this, she has no way of knowing what the second party's actual perspective is. This unfortunately gives the second party an incentive to convey the impression (through words and actions) of having a relatively severe, or self-serving, perspective. The losses sustained by the bargainers in reaching an agreement sometimes lead them to cling to an agreement even when it is no longer very suitable (external circumstances having changed), for fear of the consequences of rocking the boat. This could form the basis of a theory of inertia in dynamic models. `Sticky prices` are of major importance for the central questions of macroeconomics; price inertia in oligopolistic markets is a leading application of the `perspective in bargaining` model to be studied.