Browsing by Author "Nuutinen, Juho"

Failures in bargaining, such as strikes or stalled climate change negotiations, are costly for all parties. So why does bargaining fail when mutually beneficial agreements exist? In the thesis, the classical problem of bilateral bargaining is studied by the means of a new laboratory experiment and a literature review of related theoretical and experimental work. The main focus is on the role of commitment tactics as a source of conflict. In the literature, complete information bargaining is often deemed to be efficient whereas incomplete information is considered to be the main driver of delay. However, by simply allowing the negotiators to attempt strategic commitments that are costly to make and uncertain to succeed, unique predictions of inefficient equilibria are obtained even when bargaining under complete information. The main theoretical framework of the thesis is a dynamic bilateral bargaining model of tough negotiations and delayed agreement. In the unique stationary Markov perfect equilibrium of the model, the bargaining takes the form of a war of attrition. Negotiators initially commit themselves to incompatible demands but an agreement is reached once a commitment decays. The rates at which the commitments decay determine the expected duration of the conflict. Moreover, if the negotiators do not differ in patience the one with the stronger commitment receives in expectation a larger share of the contested surplus. The predictions of the model are tested in a new laboratory bargaining experiment. The analysis of the pilot round shows mixed results. We find some conflict and inefficiency in bargaining due to initial incompatible commitments. Furthermore, in line with the theory, more than half of the agreed offers have a different outcome than the prevalent equal sharing of much of the experimental bargaining literature. However, it cannot be concluded that the data would be completely in line with the hypotheses. The different rates at which the commitments decay do not always determine the bargaining outcome and length of the delay. Slight modifications to the experimental design, which may solve the issues detected, are discussed. The different delay patterns observed in various real-life bargaining contexts suggest that there is not a single approach which could explain all the inefficiencies. The approach emphasizing the role of strategic commitments provides an alternative to the incomplete information explanation. However, despite the rich theoretical literature, only a few experimental studies testing the commitment models exist. The pilot round of our experiment is an important contribution to this branch of bargaining literature. Certainly, further empirical research is required in order to better understand the exact role that strategic commitments have in different conflicts.