Returns to costly pre‐bargaining claims: taking a principled stand

Abstract

Purpose

To model a bargaining environment where the tactic of qualitative commitment (staking a principle) can have a demonstrably strong effect.

Design/methodology/approach

Amend the two‐person alternating offers model due to Rubinstein to include simultaneously pre‐announced stakes, and a mechanism for altering agents' utilities by reference to substantial costs of “surrendering a principle” (capitulation costs). Identify all stationary, pure strategy equilibria. Isolate subgame perfect Nash equilibria (SPNE).

Findings

SPNE is unique and offers efficient re‐allocation. For high enough capitulation costs, gains at equilibrium (relative to the bench‐mark game without commitment) result to the first‐mover. The shift in the equilibrium allocation is linear in cost.

Research limitations/implications

Symmetric fixed capitulation costs were assumed. Surrender of principle required introduction of discontinuities in the cost function (zero or fixed cost). No gradation of the cost was considered. Future directions could involve discovering what distortions are created by asymmetric costs, by gradations and from smoothing out of the discontinuity.

Practical implications

Practical implications at best point to the potential rewards available from identifying and introducing a high‐cost commitment tactics in a bargaining context.

Originality/value

The innovation is in the use of an explicit bargaining apparatus to examine the commitment tactic (previous research used an axiomatic treatment of bargaining), and in offering a model for the notion of a qualitative commitment. The result about the qualitative shift in the equilibrium is also new. The paper is thus a contribution to the understanding of how an agent may seek to influence the outcome of a game such as “divide the pie (the resource)” through the manufacture/introduction of a factor outside the original game.

Citation

Ostaszewski, A.J. (2006), "Returns to costly pre‐bargaining claims: taking a principled stand", Journal of Economic Studies, Vol. 33 No. 2, pp. 144-170. https://doi.org/10.1108/01443580610666091