Lecture Bargaining Theory Winter 2011/12

Diplom students can take MW24.5 - Quantitative Economics III as equivalent to this lecture. At the end of the lecture an exam in Barganing Theory can be written.

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.