A Behavioral Model of Bargaining with Endogenous Types

We enrich a simple two-person bargaining model by introducing \behavioral types" who concede more slowly than does the average person in the economy. The presence of behavioral types profoundly in uences the choices of optimizing types. In equilibrium, concessions are calculated to induce \reciprocity": a substantial concession by player i is followed by a period in which j is much more likely to make a concession than usual. This favors concessions by i that are neither very small nor large enough to end the bargaining immediately. A key di erence from the traditional method of perturbing a game is that the actions of our behavioral types are not speci ed in absolute terms, but relative to the norm in the population. Thus their behavior is determined endogenously as part of a social equilibrium. We would like to thank Faruk Gul, Ashvin Rajan, and Tim VanZandt for helpful comments and Sofronis Clerides for research assistance at an early stage in this project. We are indebted to Yuliy Sannikov for extensive and exceptionally skillful research assistance. The authors gratefully acknowledge the support of the National Science Foundation and the Russell Sage Foundation.