Bargaining foundation for ratio equilibrium in public‐good economies

Abstract

AbstractWe provide a bargaining foundation for the concept of ratio equilibrium in public‐good economies. We define a bargaining game of alternating offers, in which players bargain to determine their cost shares of public‐good production and a level of public good. We study the stationary subgame perfect equilibrium (SSPE) without delay of the bargaining game. We demonstrate that when the players are perfectly patient, they are indifferent between the equilibrium offers of all players. We also show that every SSPE without delay in which the ratios offered by all players are the same leads to a ratio equilibrium. In addition, we demonstrate that all equilibrium ratios are offered by the players at some SSPE without delay. We use these results to discuss the case when the assumption of perfectly patient players is relaxed and the cost of delay vanishes.