AN ARBITRATION GAME AND THE EGALITARIAN BARGAINING SOLUTION

We analyze a simple arbitration procedure which is a multi-stage varia nt of Nash's demand game. In the absence of discounting, all Nash equi libria of the game yield the egalitarian solution in the first stage. The crucial feature of our arbitration procedure is that, in the case of incompatible demands, the game is allowed to continue and the playe r who demands the higher gain over the disagreement point is penalized by restricting her or his feasible demands in the following stage. Su itable modifications of the arbitration game yield the lexicographic e xtension of the egalitarian solution, resp. the proportional solutions .