Alternating-Offer Bargaining with Two-Sided Incomplete Information

Abstract

I study alternating-offer bargaining games with two-sided incomplete information about the players' discount rates. For both perfect Bayesian equilibrium and a rationalizability-style notion, I characterize the set of expected payoffs which may arise in the game. I also construct bounds on agreements that may be made. The set of expected payoffs is easy to compute and incorporate into applied models. My main result is a full characterization of the set of perfect Bayesian equilibrium payoffs for games in which the distribution over the players' discount rates is of wide support, yet is in a weak sense close to a point mass distribution. I prove a lopsided convergence result: each player cannot gain from a slight chance that she is a strong type, but the player can suffer greatly if there is a slight chance that she is a weak type.

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