Bargaining with Imperfect Enforcement
1 September 2009
By Mark Williams with Lucy White of Harvard Business School
While the game-theoretic bargaining literature insists on a noncooperative bargaining procedure, it implicitly assumes cooperative implementation of agreements. In reality, courts cannot implement agreements costlessly, and parties often prefer to use noncooperative implementation. In this article from the RAND Journal of Economics, Lucy White of Harvard Business School and Mark Williams of NERA present a bargaining model that incorporates the idea that agreements may be enforced noncooperatively. The paper demonstrates that this has a substantial impact in limiting the inequality of agreements, and results in a nonmonotonicity of bargaining payoff in the discount rate. The model also explains why some parties may have incentives to deliberately write incomplete contracts as a way to enhance their bargaining power.
