Lecture Bargaining Theory Winter 2011/12

Prerequisites

Some game theory is helpful (e.g. as covered in BW24.2)

Literature:

• Kalai, E. & M. Smorodinsky (1975): ``Other Solutions to Nash`s Bargaining Problem'', Econometrica, 43, 513-518.Jstor
• Muthoo, A. (1999): Bargaining theory with applications. Cambridge Univ. Press, Cambridge
• Osborne, M. J. & A. Rubinstein (1990): Bargaining and markets. Academic Press, San Diego.
• Roth, A. E. (1995): Bargaining Experiments , ch. 4 in The Handbook of Experimental Economics, ed. by J. H. Kagel & A. E. Roth.
• Shaked, A. and J. Sutton (1984), Involuntary Unemployment as a Perfect Equilibrium in a Bargaining Model , Econometrica 52, 1351 1364 Jstor

Schedule:

• Introduction, Nash's bargaining solution
• proof, properties of the solution, alternatives, applications (risk aversion, crime)
• applications (asset ownership)
• applications (moral hazard in teams), discussion of Nash's axioms
• discussion of Nash's axioms (cont.).
  The strategic approach, Rubinstein's model
• Rubinstein's model (cont.)
• different equilibrium concepts in the Rubinstein model
• constant discount rates, alternative proof, fixed bargaining cost
• finitely divisible pies, outside options
• outside options (cont.), more than two players, comparison Rubinstein/Nash
• incomplete information
• Markets and decentralised trade
• decentralised trade (cont.)

Past exams:

July 2004, October 2004, January 2006, Februar 2007

Motivation:

Consider a situation where two agents obtain gains from cooperation. This could be an exchange that is mutually beneficial or a cooperation in a political or social environment. How should the agents divide the proceeds from their joint project? How is the ratio of goods in an exchange, how the result of a political or personal settlement determined? Market equilibria assume a large number of agents and the presence of a Walrasian auctioneer - assumptions that are not always fulfilled. Bargaining theory attempts to solve these problems and tries to explain how players find a settlement in a distributive conflict. Is the settlement always efficient or is it found only after time consuming and costly negotiations? Who is the winner and who the looser of a settlement? How is bargaining power determined? How, finally, can we compare such a bargaining solution with market equilibria?

Aims

Students should understand the main paradigms of axiomatic bargaining theory (Nash, Kalai-Smorodinsky) and of strategic bargaining theory (Rubinstein's alternating offer game). Optionally the course can include applications to markets.