An arbitration game and the egalitarian bargaining solution

Abstract

We analyze a simple arbitration procedure which is a multi-stage variant of Nash's demand game. In the absence of discounting, all Nash equilibria of the game yield the egalitarian solution in the first stage. The crucial feature of our arbitration procedure is that, in the case of incompatible demands, the game is allowed to continue and the player who demands the higher gain over the disagreement point is penalized by restricting her or his feasible demands in the following stage. Suitable modifications of the arbitration game yield the lexicographic extension of the egalitarian solution, resp. the proportional solutions. Journal of Economic Literature Classification Numbers: C72, C78.