Bargaining Theory Without Tears

Abstract

The purpose of this article is two-fold. The primary aim is to provide a simple proof of a version of Rubinstein's bargaining theorem in a setting that is sufficiently general to cover the situations that typically arise in applications. In particular, the feasible set is not assumed to be convex and a reasonably general view is taken of the manner in which disagreement may arise. The secondary aim pursues some points made in Binmore/Rubinstein/Wolinsky. A detailed analysis of subgame-perfect equilibria in a complicated non-cooperative bargaining model is unnecessary for most applications. Much heavy computation can be short-circuited by applying certain simple principles directly rather than deriving them anew each time they are required. The methodology is illustrated in section 8 for a model of decentralized price formation