Collaborative Research: Reputational Bargaining with Two-Sided Asymmetric Information About Fundamentals

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Most of the models economists use to predict outcomes of bilateral bargaining assume symmetric information: the two bargainers know everything they need to know about one another. But bargaining in the real world is usually conducted under two-sided asymmetric information: both parties wish they knew more about the other side's goals, priorities, strengths and weaknesses. These situations have eluded economists' grasp for many decades. This award funds work on a new approach to modeling bilateral bargaining with two-sided asymmetric information. It borrows heavily from the reputation formation literature initiated twenty-five years ago and first used to study entry into previously monopolized markets. The idea is that recognizing bargainer's incentives to form reputations (for being stubborn, or retaliatory, and so on) not only enriches the analysis, but also gives clearer results. The hope is to better understand how bargainers in these rich informational environments behave. The kinds of bargaining problems to be studied arise between countries, between regulators and firms, between suppliers and producers, and between firms and unions. A better understanding of bargaining will provide valuable insights for the formulation of labor law, international law, and regulatory policy, among many other applications.