CONTRACTING IN DYNAMIC-GAMES

We study the bargaining problem in the dynamic framework. The classica l way of solving a dynamic bargaining problem is to transform the exte nsive form game into the normal form and then apply the theory of barg aining well developed for normal form games. This means that the parti es sign a binding contract in the beginning of the game which defines their actions for the full duration of the game. In this article, we c onsider the setting where the players monitor the contract as the game evolves. The main purpose of the article is to study conditions under which the players do not have a rationale to renegotiate a new contra ct at any intermediate time period; i.e., the contract is time consist ent. Time consistency restricts the set of bargaining solutions in dyn amic games. We will show that time consistency of the contract is guar anteed if the bargaining solution satisfies the controversial independ ence-of-irrelevant-alternatives property.