Bargaining With Incomplete Information: A Two-Period Model With Continuous Uncertainty

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 a two-period bargaining model, how timing and information affect the rational behavior of agents who are unable to precommit to particular strategies. 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 and sometimes no agreement is reached. Thus, the model provides an explanation for the inefficient bargaining behavior that appears often to occur in practice.