Bargaining and reputation

The paper develops a reputation based theory of bargaining. The idea is to investigate and highlight the influence of bargaining "postures" on bargain ing outcomes. A complete information bargaining model a la Rubinstein is am ended to accommodate "irrational types" who are obstinate, and indeed for t ractability assumed to be completely inflexible in their offers and demands . A strong "independence of procedures" result is derived: after initial po stures have been adopted, the bargaining outcome is independent of the fine details of the bargaining protocol so long as both players have the opport unity to make offers frequently. The latter analysis yields a unique contin uous-time limit with a war of attrition structure. In the continuous-time g ame, equilibrium is unique, and entails delay, consequently inefficiency. T he equilibrium outcome reflects the combined influence of the rates of time preference of the players and the ex ante probabilities of different irrat ional types. As the probability of irrationality goes to zero, delay and in efficiency disappear; furthermore, if there is a rich set of types for both agents, the limit equilibrium payoffs are inversely proportional to their rates of time preference.