Optimism, delay and (in)efficiency in a stochastic model of bargaining

Abstract

I study a bilateral bargaining game in which the size of the surplus follows a stochastic process and in which players might be optimistic about their bargaining power. Following Yildiz (2003), I model optimism by assuming that players have different beliefs about the recognition process. I show that the unique subgame perfect equilibrium of this game might involve inefficient delays. I also show that these inefficiencies disappear when players can make offers arbitrarily frequently.