“Communication in Bargaining over Decision Rights” by Wooyoung Lim
The Hong Kong University of Science and Technology
This paper develops a model of bargaining over decision-rights between an uninformed principal and an informed but self-interested agent. We introduce two different bargaining mechanisms – tacit and explicit bargaining. In the tacit bargaining, the uninformed principal makes a take-it-or-leave-it price offer to the agent who then decides either to accept or to reject the offer. In equilibrium of the game, the agent's private information could not be fully used when decision is made. In the explicit bargaining in which parties can communicate explicitly via cheap-talk before the tacit bargaining, however, there exists a truth-telling perfect Bayesian equilibrium, even when the conflict of interest is arbitrarily large. We also follow a mechanism design approach and show that under certain conditions the explicit bargaining is an optimal bargaining mechanism that maximizes a joint surplus of parties.