Faculty of Business Seminar Series/ Nejat Anbarcı

Title: Strategic Investments in Bargaining Positions with a Fixed Surplus

Abstract: In this paper, by reversing the crucial assumptions of the property rights literature, we assume that (i) endogenous investments are also completely person-specific instead of being relation-specific, and (ii) information is typically asymmetric since at least one party would know her disagreement payoff more precisely than the other party. Within our setup, it is then possible to analyze new topics such as pre-emptive retention offers vs. ex-post counter-offers as well as bringing a new light to age-old issues such as arms races in a conflict, out-of-court settlements in litigations, lobbying, and opportunistic behavior in mergers and acquisitions, etc.

We consider a bargaining game, where Player 1 makes a take-it-or-leave-it offer after Player 2 makes a costly investment that increases her disagreement payoff from one of the two initial disagreement payoff levels. When Player 1 observes the final disagreement payoff of Player 2, both types of Player 2 make investments to increase their bargaining power in the unique equilibrium.

When Player 1 does not observe the investment and type of Player 2 but receives some noisy information, he has to estimate not only the type of Player 2 but also her investment. Player 2, on the other hand, invests both to insure herself against disagreement but also to manipulate the expectations of Player 1. However, we find that manipulation incentive is not a complement to the insurance incentive but rather a substitute for the high type of Player 2, whereas there is no insurance motive for Player 2 of the low type.

Place: Meeting Room AB2-345