Conferences at Department of Economics, University of Toronto, Canadian Economic Theory Conference 2012

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Bargaining with Uncertain Commitment: On the Limits of Disagreement

Rohan Dutta*

Last modified: 2012-05-05

Abstract


This paper examines commitment in a two stage bargaining setting using global games arguments. The object is to study the possibility of disagreement. Earlier work such as Crawford(1982) assumed that the cost of revoking a commitment attempt was private information and showed that not only can disagreement occur but when there is little probability of a high revoking cost, any equilibrium must entail the possibility of disagreement. Here I examine the symmetric information case where the revoking costs become publicly known following incompatible demands. This is the natural environment when revoking costs are in the form of audience costs in international negotiations or labor disputes. When the revoking cost is drawn from a binary distribution that is either zero or larger than the size of the pie, disagreement is an equilibrium outcome, even if both players face the same uncertain cost. However, with continuous distributions and global game perturbations, disagreement is possible only if the independent distributions of revoking costs fail to stochastically dominate the uniform distribution. Both players facing the same uncertain cost never leads to disagreement. The sharp contrast with the symmetric information disagreement results of Ellingsen and Miettinen(2008) is shown to stem from deriving the success probability of a commitment attempt from equilibrium behavior instead of assuming it to be exogenous.

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