“Inefficiency and Contracts in Multilateral Bargaining” by Hongbin CAI
University of California, Los Angeles and Yale University
This paper studies a complete-information bargaining model in which the total surplus is uncertain at the time of bargaining. The surplus accrues to an “active” player (e.g., firm) and is not observed by other “passive” players (e.g., workers). We show that there is a unique subgame perfect equilibrium of the game with any number of players. The equilibrium outcome is inefficient in the sense that positive gains from trade, even though commonly known, are left unrealized. Transaction inefficiency becomes more severe as the number of the passive players increases or as their bargaining power increases. Several applications are then discussed.