Non-cooperative Bargaining for Side Payments Contract

Abstract

We present a non-cooperative sequential bargaining game for side payments contracting. Players voluntarily participate in negotiations. If any player does not participate, then renegotiation will take place in the next round, given an on-going contract. We show that if the stopping probability of negotiations is sufficiently small, then there exists an efficient Markov perfect equilibrium where all players immediately participate in negotiations and agree to the Nash bargaining solution. The efficiency result is strengthened by the asymptotically efficient one that in every Markov perfect equilibrium, all players participate in negotiations through a process of renegotiations in the long run with probability one. Finally, we illustrate international negotiations for climate change as an application of the result.