Lecture Bargaining Theory Summer 2013
 Date
This course is part of the International Max Planck Research School on Adapting Behavior in a Fundamentally Uncertain World.
It can also be credited as a part of MW24.3
 As a block, from 5.8.9.8.2013, 14:00, V14, MPI für Ökonomik,
 Exam
 9.8.2013
 Prerequisites
 Some game theory (e.g. as covered in BW24.2),
basic calculus (here are some basic differentiation rules)
 Literature:

 Kalai, E. & M. Smorodinsky (1975):
“Other Solutions to Nash`s Bargaining Problem”, Econometrica,
43, 513518.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
 Outline:

 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,
KalaiSmorodinsky) and of strategic bargaining theory (Rubinstein's alternating
offer game). Optionally the course can include applications to markets.