Dynamic Bargaining Model Research Articles

When Adaptation Fails

A rationale based on adaptive learning is used to explain inefficient bargaining under private information. A dynamic bargaining model using genetic algorithms is developed in which independent but interacting negotiators coevolve their offers. A computer simulation analysis is conducted that compares bargaining outcomes under complete and incomplete information. Results show that inefficient bargaining (i.e., delays and failures to agree) may be due to problems in the agents' adaptive processes that arise because of incomplete information and that adaptive failures may occur even under complete information. Adaptive learning is identified as both a mechanism for resolving conflict and a potential source of conflict.

Presidential Pork: Executive Veto Power and Distributive Politics

It is often argued that executive powers such as the veto serve to reduce particularistic spending by the legislature. I argue that the effect of the executive veto depends strongly on assumptions about both the nature of executive preferences and the institutional structure of executive-legislative bargaining. To support these claims, I develop a model of distributive policymaking subject to an executive veto. This framework incorporates variation in presidential objectives and formal powers into a dynamic bargaining model. In equilibrium, stronger veto power leads to a lower level of distributive spending, but the effects are mitigated to the extent that the president prefers spending in some districts over others. The model also generates new insights and predictions about fiscal policy under the separation of powers, including the effects of divided government, electoral rules, and term limitations for the executive.

A model of negotiated transfer pricing

A large majority of firms employ negotiated transfer pricing, yet this method of decentralization remains largely unexplored. This study develops a model of negotiated transfer pricing incorporating private divisional information, as this is the setting where decentralization is most compelling. The firm designs a compensation system utilizing divisional performance evaluation and negotiated transfer pricing. A dynamic bargaining model is employed to capture managerial negotiations. The study demonstrates that the firm can design managerial-compensation schemes and bargaining infrastructures so that the negotiated transfer-pricing structure allows it to reach the upper bound on available profits.

Inventories and Strikes

This paper analyses a dynamic model of bargaining and strikes in which the reservation wage of union members in each period is private information. The model endogenizes the firm's decision to accumulate inventories of finished goods in order to enhance its bargaining position. With higher inventories, the firm makes a lower wage offer, thereby accepting an increased probability of a strike. The model can help explain empirical results that have found a positive correlation between wages and inventory accumulation. It also shows that, unless inventories are controlled for, strike incidence will exhibit a spurious negative state dependence.

A Dynamic Model of Bargaining in a Unionized Firm with Irreversible Investment

This paper develops a dynamic model of bargaining between a firm and a union. Capital is assumed to be firm-specific, so only nonnegative investments are possible. Collective bargaining contracts specify the level of the wage rate that will prevail for a fixed contract length, while the firm unilaterally chooses employment. Two types of equilibria are considered. In one equilibrium, the wage-employment outcomes lie on the marginal revenue product of labor curve and the wage is determined by a generalized Nash bargain. This equilibrium is Pareto inefficient. In another equilibrium, wage-employment pairs lie on the contract curve and wages are set above the marginal product of labor. In this equilibrium, the firm's desire to reduce employment is offset by punishment strategies in which the union bargains tougher in the future and the Pareto inefficient equilibrium prevails. Existence results are established and the equilibria are characrerized for a particular specification of the firm's revenue function and the union's temporal utility function, using recursive methods. The model is calibrated on stylized facts from the U.S. economy. It turns out that the calibrated model can account for several other stylized facts; in particular, the relatively low variability of the wage rate and the countercyclicality of the union wage premium. Moreover, it is found that irreversibilities are crucial in this respect, in the ergodic as well as the nonergodic states.

Bargaining Foundations of Shapely Value

A transferable utility economy in which each agent holds a resource which can be used in combination with the resources of other agents to generate value (according to the characteristic function V) is studied using a dynamic model of bargaining. The main theorem establishes that the payoffs associated with efficient equilibria converge to the agents' Shapley values as the time between periods of the dynamic game goes to zero. In addition it is demonstrated that an efficient equilibrium exists and is unique when an additivity condition is satisfied. To demonstrate the sensitivity of the solution to the institutional detail we modify the model to allow for partnerships and show that the Shapley value is no longer achieved.