The Structure of Negotiations: Incomplete Agreements and the Focusing Effect

Abstract

We study the use of incomplete agreements in a deterministic environment. If preferences are distorted by the focusing effect, the negotiating players may negotiate in stages: first signing an incomplete agreement and then finalizing the outcome of the negotiation. The first bargaining stage can be used to eliminate extreme outcomes from the possible bargaining solutions, hence increasing the value of the agreement for the players whose preferences are distorted by the focusing effect. Our framework justifies the existence of a number of pre-bargaining actions. For example, a seller may enter the negotiation over the sale of a good having already announced a maximum price. Similarly, a seller may prefer to produce a good and later bargain over the price of the good (i.e. may prefer to be held up), rather than simultaneously bargain over price and quality.