Bargaining with Imperfect Enforcement
Description
The game-theoretic bargaining literature insists on non-cooperative bargaining procedure but allows cooperative implementation of agreements. The effect of this is to allow free-reign of bargaining power with no check upon it. In reality, courts cannot implement agreements costlessly, and parties often prefer to use non-cooperative implementation. We present the first model of non-cooperative implementation of bargains, showing that this has a substantial impact in limiting the inequality of agreements, and results in a non-montonicity of the discount rate. The general need to maintain incentives for co-operation means that apparently “other-regarding” elements must enter the utility function. Thus we explain why experimental subjects might have a rule of thumb of proposing “fair” bargains. The model also explains why some parties may deliberately write incomplete contracts which cannot be enforced in a court of law.
JEL Classification: C72, C78, C91, D23
Keywords: Non-Cooperative Bargaining, Enforcement, Strength in Weakness, Incomplete Contracts.
This paper appeared in the Rand Journal of Economics in the Summer of 2009.