Bargaining Under Strategic Uncertainty

This paper provides a novel understanding of delays in reaching agreements based on the idea of strategic uncertainty—i.e., the idea that a Bargainer may face uncertainty about her opponent’s play, even if there is no uncertainty about the structure of the game. It considers a particular form of strategic uncertainty, called on path strategic certainty. On path strategic certainty is the assumption that strategic uncertainty can only arise after surprise moves in the negotiation process. The paper shows that Bargainers who engage in forward induction reasoning can face strategic uncertainty after surprise moves. Moreover, rational Bargainers who engage in forward induction reasoning and satisfy on path strategic certainty may experience delays in reaching agreements, even if they engage in forward induction reasoning. The paper goes on to characterize the behavioral implications of rationality, forward induction reasoning, and on path strategic certainty. Bargaining is an important feature of many economic and political phenomena. Understanding how negotiators form agreements is instrumental to understanding employment contracts, legislative outcomes, sovereign debt, etc. In each of these applications, we observe an important behavioral feature: at times, parties fail to reach an immediate agreement. Such failures lead to strikes, holdouts, legislative stalemates, delays in renegotiating debt contracts, and so on. Each of these situations have important (and sometimes long-term) economic consequences. What is the source of such negotiation failures? Many answers have been put forward in the literature. One natural answer is that such failures reflect incomplete information, i.e., reflect the fact that bargainers face uncertainty about some structural aspect of the game. This can be uncertainty about how bargainers value the object (see, e.g., Admati and Perry, 1987; Sobel and Takahashi, 1983; Cramton, 1984; Fudenberg, Levine and Tirole, 1985; Grossman and Perry, ∗Arizona State University, [email protected]. I am indebted to Ethan Bueno de Mesquita, Martin Cripps, Eddie Dekel, Max Stinchcombe, Asher Wolinsky and, especially, Marciano Siniscalchi, for helpful conversations. I also thank audiences at the Paris Game Theory Seminar, Northwestern University, University of Texas, University of British Columbia, the Game Theory Society World Congress, the Belief Change in Social Context Workshop, the Games Interactive Reasoning and Learning Workshop, the Tsingua Economic Theory Conference, and the Society for Advancement of Economic Theory. Much of this paper was written while visiting University College London; I am indebted to UCL for their continued hospitality.