Bilateral Bargaining Model Research Articles

Bargaining strategy of oil companies in international oil and gas development Projects–Based on a bilateral bargaining model

Bargaining between the host country and oil companies is very common to international oil and gas development projects. The existence of information asymmetry gives the host country an endogenous bargaining advantage. Foreign oil companies might change their unfavorable negotiating position by changing the order of bidding and adjusting bidding strategies. This paper introduces both factors into a bilateral bargaining model to study the impact of information asymmetry and bidding order on the strategy and equilibrium returns of oil companies. According to the ownership of the right to bid first, two scenarios are designed for the model to compare the equilibrium returns of the host country and oil companies. The results show that: 1) There is a first-mover advantage in the process of bilateral bidding, so oil companies better bid first; 2) The information asymmetry will lead to a higher nominal income ratio of oil companies and a lower nominal income ratio of the host country, but it doesn't affect the total income ratio at all.

Price discovery in a matching and bargaining market with aggregate uncertainty

We introduce aggregate uncertainty into a Rubinstein and Wolinsky (1985)-type dynamic matching and bilateral bargaining model. The market can be either in a high state, where there are more buyers than sellers, or in a low state, where there are more sellers than buyers. Traders do not know the state. They randomly meet each other and bargain by making take-it-or-leave-it offers. The only information transmitted in a meeting is the time a trader spent on the market. There are two kinds of search frictions: time discounting and exogenous exit. We find that as the search frictions vanish, the market discovers the competitive price quickly: the prices offered in equilibrium converge in expectation to the true-state Walrasian price at the rate linear in the total search friction. This rate is the same as it would be if the state were commonly known.

Price Discovery in a Matching and Bargaining Market with Aggregate Uncertainty

We introduce aggregate uncertainty into a Rubinstein and Wolinsky (1985)-type dynamic matching and bilateral bargaining model. The market can be either in a high state, where there are more buyers than sellers, or in a low state, where there are more sellers than buyers. Traders do not know the state. They randomly meet each other and bargain by making take-it-or-leave-it offers. The only information transmitted in a meeting is the time a trader spent on the market. There are two kinds of search frictions: time discounting and exogenous exit. We find that as the search frictions vanish, the market discovers the competitive price quickly: the prices offered in equilibrium converge in expectation to the true-state Walrasian price at the rate linear in the total search friction. This rate is the same as it would be if the state were commonly known.

Price Effects of Target Ratcheting: A Progress Report on Medical Devices

Regulators, who have asymmetric information concerning the technology of regulated firms, often rely on incentive-based regulation. While such a scheme is well known to be vulnerable to the adverse incentives of regulated firms, empirical research that quantifies the magnitude of distortion caused by incentive regulation is scarce. This paper is a progress report of our recent project on target ratcheting with an application to medical devices in Japan. A casual observation of detailed product-level transaction data and reduced-form analyses indicate the existence of pricing distortion in the wholesale market. The paper also proposes a two-period bilateral bargaining model to match the data. A preliminary analysis finds evidence consistent with the hypothesis that target ratcheting distorts the pricing of regulated firms, but the magnitude of the distortion is estimated to be economically small.

A continuous-time model of bilateral bargaining

This paper constructs a continuous-time model of bilateral bargaining to study how fluctuations in bargaining power affect the outcomes of negotiations. The paper deals with the technical complexities that arise when modeling games in continuous time by building strategy restrictions into the equilibrium definition. These restrictions select a unique equilibrium, which is characterized by a system of ordinary differential equations. This unique equilibrium corresponds to the limiting subgame perfect equilibrium of discrete-time bargaining games with frequent offers.

INVESTIGATING BARGAINING POWER OF FARMERS AND PROCESSORS IN IRAN'S DAIRY MARKET

AbstractThe farm-gate price of raw milk in Iran is determined annually in negotiations among representatives of dairy processors, milk producers, and government officials. This study estimates the average bargaining power of dairy farmers and processors, through applying the generalized axiomatic Nash approach in a bilateral bargaining model. We employ annual data from 1990 to 2013 to estimate econometric representation of a bilateral bargaining model using a Monte Carlo expectation maximization algorithm. Results imply a higher bargaining power of 0.69 for processors, compared with 0.31 for farmers. This asymmetry of bargaining power causes unequal allocation of gains in the milk market.

Alternating-offer bargaining with the global games information structure

In this study, I examine the alternating-offer bilateral bargaining model with private correlated values. The correlation of values is modeled via the global games information structure. I focus on the double limits of perfect Bayesian equilibria as offers become frequent and the correlation approaches perfect. I characterize the Pareto frontier of the double limits and show that it is efficient, but the surplus split generally differs from the Nash Bargaining split. I then construct a double limit that approximates the Nash Bargaining split in the ex-post surplus, but with a delay. Further, I prove the Folk theorem when the range of the buyer's values coincides with the range of the seller's costs: any feasible and individually rational ex-ante payoff profile can be approximated by a double limit.

Vertical Bargaining and Retail Competition: What Drives Countervailing Power?

This article investigates the effects of changes in market concentration on the equilibrium prices in a supply chain. Results are derived from a theoretical model of bilateral bargaining between upstream and downstream firms which allows for general forms of demand and retail competition. Whether countervailing buyer power arises, in the form of lower input prices following greater concentration downstream, depends on the pass-through rate of input prices to retail prices. Countervailing buyer power generally does not translate into lower retail prices because of heightened market power at the retail level.

Harmonized Legislative Management on Constructing International Enforceable Arbitral Awards in Decentralized Post-Award Bargaining Systems

Harmonized legislative managements on national legislations for balancing the arbitral interests of the parties in post-award reviews is worth exploring for the reasons of little discussion about the uniform legislative control on the variables of post-award procedures in different jurisdictions and the enhancement of post-award renegotiations or court-facilitated mediations for constructing international enforceable arbitral awards. The purpose of this paper is to study the efficiency, fairness, and sustainability of the grounds for the consolidation of international enforceability of arbitral awards. The author examined cases on the enforceability of foreign arbitral awards with comparative studies on Federal Arbitration Act, ZPO (Ger.), C.P.C. (Fr.) and explored the trends of legal harmonization, the restatements of arbitration laws, the procedural delocalization of arbitral proceedings. Firstly, the author studied international arbitral legislative coordination of constructing international enforceability of arbitral awards for balancing legitimacy interests and efficacy costs of post-award reviews. Secondly, the author schemed the frameworks of building up arbitral resilience in international enforceability of arbitral awards and the role of courts in supervising arbitrations. Thirdly, the author studied two models for the post-award bargaining: legislative optimal control problem and post-award efficiency bargaining processes, to understand the incentive structures of legislative optimization. Firstly, judging from the convergent results of bilateral bargaining model, the author suggested that elevating the party’s arbitral interests valuation since guaranteeing the allocation efficiency of post-award bargaining mechanism is not possible. Secondly, the author concluded that to solve the optimal control problem of international legislative coordination for consolidating the international enforceability of arbitral awards, enhancing the self-organization of national legislative control is helpful since the equilibrium is non-optimal in decentralized bargaining systems. Thirdly, the author emphasized the post-award renegotiations designed by national arbitrations for constructing international enforceable awards by improving the incentive structures of harmonized legislative managements.

Equity bargaining with common value

We study a common-value bilateral bargaining model with equity offer. In particular, we consider a model in which players bargain over an equity share of a common-value stochastic pie (i.i.d. over time) and players receive private signals on the size of the pie each period. Efficient agreement is a stochastic rule: Delay is efficient if the expected size of today’s pie is small and the discount factor is high. Hence, information aggregation is crucial for efficiency. We derive the conditions under which an equilibrium that attains the efficient agreement exists. The key idea is that the proposer makes an offer in such a way that the responder will use her signal if the responder’s signal is crucial for an efficient agreement.

Central bank standing facilities, counterparty risk, and OTC-interbank lending

The paper asks how changes in monetary policy interest rates influence the functioning of uncollateralized interbank markets if banks are subject to counterparty risk. We concentrate on the central bank's marginal lending and deposit facilities. Since interbank trades are usually over-the-counter transactions, we use a bilateral bargaining model and apply the Nash bargaining solution. We determine the threat points and the bargaining frontier of debtor banks and creditor banks in the interbank markets. We show that a decrease in the central bank's marginal lending rate always reduces the probability for reaching a bargaining solution. In contrast, the chances that the banks agree on an interbank loan can both decrease or increase following a reduction in the deposit rate.

A Tale of Two Bargaining Solutions

We set up a rich bilateral bargaining model with four salient points (disagreement point, ideal point, reference point, and tempered aspirations point), where the disagreement point and the utility possibilities frontier are endogenously determined. This model allows us to compare two bargaining solutions that use reference points, the Gupta-Livne solution and the tempered aspirations solution, in terms of Pareto efficiency in a strategic framework. Our main result shows that the weights solutions place on the disagreement point do not directly imply a unique efficiency ranking in this bargaining problem with a reference point. In particular, the introduction of a reference point brings one more degree of freedom to the model which requires also the difference in the weights placed on the reference point to be considered in reaching an efficiency ranking.

AN EXPERIMENTAL STUDY OF COMPUTER-BASED NEGOTIATION IN PROPERTY DEVELOPMENT PROCESSES

This paper reports an experiment based on the model of bilateral sequential bargaining over the distribution of a certain value in a laboratory setting within a real specific context of property development in the Netherlands. We have involved only property development professionals as participants in the experiment who have experience with the context. We have also extended the experiment into three different negotiation games distinguished by the availability of information to the participants: a negotiation game with incomplete information, asymmetric information, and complete information. We have found in this experiment that the availability of information could affect the plausibility to reach an agreement, particularly due to a restricted communication setting. This study also provides evidences that it is in the negotiators’ concern to reach an agreement with a fair outcome, which is defined here as the equilibrium, regardless the availability of the information to them.

Alternating-Offer Bargaining with a Global Games Information Structure

This paper studies frequent-offer limits of perfect Bayesian equilibria in the alternating-offer bilateral bargaining model with private correlated values. The correlation of values is modeled via the global games information structure: values depend on the unobserved quality of the object and idiosyncratic factors. For any level of correlation we construct a punishing path that exhibits the Coasian dynamics and enables to sustain a variety of outcomes even when the correlation of values is almost perfect. We characterize the Pareto frontier of frequent-offer PBE limits as the correlation approaches perfect and show that such limits exhibit no delay, but the surplus split generally differs from that in the complete-information game. We also construct frequent-offer PBE limits that exhibit trade delays even when the correlation of values is close to perfect. Our findings highlight the role of public information for bargaining delays.

Explaining breakdowns in interbank lending: A bilateral bargaining model

The paper provides a simple model for interbank loans. Since interbank trades are usually over-the-counter transactions, we use a bilateral bargaining model and apply the Nash bargaining solution. We determine the threat points and the bargaining frontier of debtor and creditor banks. We ask under which conditions interbank lending will break down.

Testing the Endowment Effect for Default Rules

AbstractThis paper explores potential endowment effects of contractual default rules. For this purpose, we analyze the Hadley liability default clause in a model of bilateral bargaining of lotteries against safe options. The liability default clause determines the right for the safe payoff option. We test the model in series of laboratory experiments. The results reveal a substantial willingness-to-accept to willingness-to-pay gap for the right to change lotteries against safe options. Even if we apply the incentive compatible Becker-DeGroot-Marschak value elicitation mechanism, there is a significant gap indicating a robust endowment effect caused by default rules. Differences of expected values of the lotteries and the safe options consistently decrease the gaps. Implications for applications of default rules in the law are discussed.

Testing the Endowment Effect for Default Rules

This paper explores potential endowment effects of contractual default rules. For this purpose, we analyze the Hadley liability default clause in a model of bilateral bargaining of lotteries against safe options. The liability default clause determines the right for the safe payoff option. We test the model in series of laboratory experiments. The results reveal a substantial willingness-to-accept to willingness-to-pay gap for the right to change lotteries against safe options. Even if we apply the incentive compatible Becker-DeGroot-Marschak value elicitation mechanism, there is a significant gap indicating a robust endowment effect caused by default rules. Differences of expected values of the lotteries and the safe options consistently decrease the gaps. Implications for applications of default rules in the law are discussed.

Information and evidence in bargaining

In a simple bilateral bargaining model with two-sided private information, players may receive signals about the value of the available surplus. The equilibrium of this game when signals are unverifiable information is qualitatively different from when they constitute verifiable evidence: in the latter case some proposer types will always separate, whereas in the former no information is ever transmitted. Despite the presence of “unraveling”, the proposer is always better off with verifiable evidence, although efficiency may be adversely affected. Interpreting the ability to generate verifiable evidence as bargaining skill, a player benefits from being more skilful and may also be better off with a more skilful rival.

Negotiating constitutions for political unions

This paper provides a cradle-to-grave model of political merger between two states and highlights the role of cross-border disparities in material and technological endowments in state formation. This issue has not received adequate theoretical attention in the existing scholarship that has largely focussed on factors like defence, trade, and public goods provision. In this paper, merger negotiations are modelled using a bilateral bargaining model with inside options and contest as an outside option. It is shown that the threat of contest constrains the set of mutually acceptable taxes and, more importantly, it provides stability to the federal constitution by making the punishment strategy in the secession rule credible. The existence of negotiated and contested constitutional merger agreements that are path dependent but time-consistent is shown. Also, the rent extracted by the advanced province in the union for transferring technology to the backward province is shown to be increasing in the complexity of technology but bounded from above. Finally, the impact of demographic heterogeneity on the feasibility of inter-state mergers is discussed.

Votes or money? Theory and evidence from the US Congress

This paper investigates the relationship between the size of interest groups in terms of voter representation and the interest group's campaign contributions to politicians. We uncover a robust hump-shaped relationship between the voting share of an interest group and its contributions to a legislator. This pattern is rationalized in a simultaneous bilateral bargaining model where the larger size of an interest group affects the amount of surplus to be split with the politician (thereby increasing contributions), but is also correlated with the strength of direct voter support the group can offer instead of monetary funds (thereby decreasing contributions). The model yields simple structural equations that we estimate at the district level employing data on individual and PAC donations and local employment by sector. This procedure yields estimates of electoral uncertainty and politicians' effectiveness as perceived by the interest groups. Our approach also implicitly delivers a novel method for estimating the impact of campaign spending on election outcomes: we find that an additional vote costs a politician on average $145.