Bargaining with Incomplete Information: An Infinite-Horizon Model with Continuous Uncertainty

By Peter C. Cramton
1983| Working Paper No. 680

The resolution of any bargaining conflict depends crucially on the relative urgency of the agents to reach agreement, the information each agent has about the others’ preferences, and the agents’ ability to commit to particular bargaining strategies. In this paper, I explore, within the context of an infinite-horizon bargaining model, how timing and information affect the rational behavior of agents who are unable to precommit to particular strategies. The bargainers, since they are unable to commit to leaving the negotiating table, must continue bargaining so long as each expects positive gains from continuing. It is found that costs of delaying agreement tend to encourage an early resolution of the bargaining conflict; whereas, incomplete information about preferences results in bargaining inefficiencies: trade often occurs after costly delay. Thus, the model provides an explanation for the inefficient bargaining behavior that appears to occur often in practice.