Econometrica: Sep, 2012, Volume 80, Issue 5
Reputational Bargaining With Minimal Knowledge of Rationality
Two players announce bargaining postures to which they may become committed and then bargain over the division of a surplus. The share of the surplus that a player can guarantee herself under first‐order knowledge of rationality is determined (as a function of her probability of becoming committed), as is the bargaining posture that she must announce in order to guarantee herself this much. This “maxmin” share of the surplus is large relative to the probability of becoming committed (e.g., it equals 30% if the commitment probability is 1 in 10 and equals 13% if the commitment probability is 1 in 1000), and the corresponding bargaining posture simply demands this share plus compensation for any delay in reaching agreement.
Supplement to "Reputational Bargaining with Minimal Knowledge of Rationality"
This appendix shows that the characterization of the maxmin payoff and posture (Theorem 1) continues to apply when the solution concept is strengthened from first-order knowledge of rationality to iterated conditional dominance, or when the continuous-time bargaining protocol of the text is replaced by any discrete-time bargaining protocol with sufficiently frequent offers.