5

Perfect Eqmililrria iru Salgair:ing Models

K. Binmore

i INTRODUCTIObJ

ln clrapters 2,4,8and 1i and in l3i¡lmore (1 9El) { explcre sro!"nr ccnseq$ence5

oi ihe Nash approach to cooperative Barne theory tbr l-".',,r:-persan bargair:ing
sames, ln a iater paper rvith the titie "Barg*ining and coaiitions'so¡ne cf these
ideas wil] be extenrled to the case of" mlrlti-persoll ¡nlrgairring garnes with
particular re1-c¡*fice to tire question of i:c¡alition fornratio¡r" "fhe results arc
obtained by examlning baigaining nr"ciXei¡l baseci c¡i that intreduced by
iiubiris,tein irr cha¡rter 3.
We fi*d it ccnvernient to employ a sonrewhat dilferent lecirniqr;e to that
used hy fdr¡lrinstein and the purpose of the ';urrent char;ter is ta illustrate
this tecitriqur: ln the two-person case, The chapter is therefcl'e','ery much a
p*stscript io Rubins¡ein's work. l{owever, we do reli¡ie his r*s¡-rlis tir} son!e
t:x,terit aí!d cc,nsider, in na¡tii-'ular. exanrpies in u'hich the'uargaining rlrclcess
irrvclvel rarda¡n nro!-rrs otr ül wi-rich1he'cake'cioes ¡lnt sliriri: rt¡ediiy r:v*;
time .

i A ltlJ[tlNST!]trtr*-T'Yllll N{OD|.i-

'l'rvu p1a5's¡5 jabelled 1 a:rd 2 alterr.aie in having lirt cpircrtunitv to coii!rtr'"in1-

{rate a proposal io tli* other. W}ren a i:rop'r:sal is madc Lr), r:ne p}:ly';r, t[:c
oiher nlay accept or re.ject the proposal" trf the proposal is ar:i*pted. tlrcn the
game ends with the implernentation oi' the proposol. 13.:l.ir piay-ers prcfcr tlre
acce ptance of any f e*.sible prt-rposal to lhe rejection of ail ;rrlprosais-
It rs assumerJ thal 1he oppr:liunities fi:r uraking prüpasuls:rre restriclccl Io
timi:l t,, (n =.0, l,1,. -.1 wtrrere (rr) lli stricliy ilicleasi*¡l with ¡,r = 0. ,4
proposal at ti¡ne / consists oi a utility pair r.:hosen froni a givei: leasible set
jil g tltt. Both (f.) tnd the s*tstll¡ are to be uri{iet$t*$d *s pre'deter¡litr¡ed
uninfluenceil by ihe players'strategy choices.
anci
Itis supposed tliroughout that each set ."t:r is cicsed ¡ntl br¡unded abt¡vc
and that its Pareto frontier 9, is,:ottnecf.ed. (Sc ¡av x i¡ Prrt:ljo¡rtrtnal iti
 Per.fect equilibria in hargainütg rnodels 79
7li Ptrfect *¡uilibria itt lturgaütüig tnttdels

xüe l'lj

n2 e Xt,
Possible choice
l:'rriect equilibrium
F igurt 5. 1

'Critical pi¿v'
:,llil anrl only' if .l'r)xr and.v2)'"t2 irnplies y G:ii Tltr: F¿r*to fro¡riier cl Colltinueti rrlav leads 1

IO OUICOffiE { f.1,._
is tire set of all its Pareto*ptimal points. see figure 5.1.)
:.,i."

ftubiustein in r:hapter -l studied tlre perfect equilibria (in ¡rurc strategies) Fi.gLtrt 5. )
r:i garnes of this general lype altlior-rgh he lound it conrputatioriallv corlvcni-
cnt to irnposc lnlrc stiingeilt r--onditions on the sec¡uence (fn) and the sets 2:r.
;\ structural rather than a technical dif-tere¡rcr- b,rt'¿'een tire r¡loriel riescribed eqLrilibriunr' in Seiten'l c,riginal sense. Slich an equiiiL'riur:r is scmeti¡r:es said
abr¡ve and Rubirr¡.tein's rnodel is that the c'.¡rrrnt ulodt:l iioes ncrt rerluire that to be 'subgarlle perlect'.
tlic playeru neccssariiv make a pro¡rosal ai e¿ih tinre tlie1, havt'tlte opiror- l\,*position l. suppose that player I is the frropo:itf ar limc ¡i.r :)r1d thrl
:rn1, uerl'ect equilibrium oiltcome z in a suirgaruc iom¡Ienclng al tilne f¡
tunit!' to do so. This extra lreedorn Coes not at'lect the periecI er¡uilibriiuu s:tts-
úutconres uncier a 'steadily sl'rrinking cake' assurnpticn as enrpl,ryed by ires ri? (22(rtf. Then any perfect equilit-rr!urrl outcílrne y in a subganie
Il.r¡binsteiu. BLrt its ab:ence ''vould seric¡usly distort tht'situa!ion lvlten the cornmcncing at time fp-, satisfies / (.1'1 ancl r'"4 {"/: where
cai"e is not steadil) shrinking or when scv*r¿l players are bargaining c'aer j t-:/tn-t \\lt]i 'i-1< /if'
I lf tll,'rt e.tis[s x u,4o-rrvir!r .tf ) M ancl
':
u,hich coalition is to Í-orn.¡. ln these lattcr ,j;se-q a player rnav well wish ti:
then
avoid inalcing a proposal at a tirne *'hen iu: has tir* opportunitv Io eJo so
because iir'anficipates having a morr-'iavoulabic proposal acce¡r,ted ir: tl-re / =, inlixr:Gr,,'t4 €9ro-r,\.
iut ure . (See i'igure 5 .3 .)
iliagrarns 4ike ligure 5.f are sr¡metir¡es helpir-rl in clariiying the reas.rn:rlq
2 trf loL ali x É j{-,.-x2),4f . th*n
r¡.,hich we shall c:nrpioy.'fhe tigure inCicates sonle possible perfect equilibriunr
choices on a sectiorl o1- the appropriate gaure tree. / - strFi¡r : (x:. rz\( -tln
r,
iSce irgure 5 .4.)
3 f)therwisc. i .: ''- m (see f igure 5.5.).
3 C'LiARA{ T}:ltlZ,qTION OIr PI Rl:EC-l' }:QLI!-IBRIUNf OL]T{]O¡,{ES J¡'-' *"ith
PrtttrJ'. \n equiiibrium, player 2 wiltr reject any propusaf )/ ál 1i]1lr
.I'1<1 m, Tlius either he accepts a
prrlposal at tinle i¿-, *ílh 't''¡ )-r rrt or *lse
We nr¡rv dcscribe a rnethr-¡rJ rvhich provicles a geotnctrie cila¡actt--riz¡riorr iii the
r,r'e proceed to tilne f¿ when all eqiliiibriunl olttcome$ z liaf i-St! :".i; n; tr¡'
perfect rquilibriurr or.¡tconres (in pure s{rategies) lbr tire nrudel introduced I Tlit
liyüi-.thesis. This deals with case -3 and part i:f remtli*ilet
case r''í
above. Nclte thal we tollow Rubinstein in using tire ternrinoiogy '¡terfect
 8{J Perfect eqwílihria fu bargain*ry ma<:lels
Ptrfett equilibria in burgaíning madels 8i

¡rcrssilrr lities
time lr l
-_at I
I possibilities
i x¡- ñ4 at tirne f*- I
:,ivl|)a).:71

x¡=lW

x? =,rr,
possibilities
Xz= m at time tr
i I
I
l I

possibilities I

at tin]e fÉ i xr:l X1:a

lxr=l
Figure 5.6
Figure -5.3 Standa¡d case l.

Pra<tJ. Fla,yer i rr¡oi-rld prefer tc r:ass r*ih*r tha¡l to tal<e ection which ieaCs
lo .;ii outcome y with .tt d ¿r "

[topositricn 3. if, in pr*rpasition i. it ís k!]üw¡r thti r1 .*l lor all z. lhen

-t'1
( r*ax {.,,1 , l, } where

i [1' ttr*r,: t¡xi..ts xl e "4,, -, with "'c! ,;* rn ar,i x1 t:.;ltrr_r l.lith xi <. rn.
thr:n

L .= suir . y 1 I ¡,. r nt \ ::..';r',u .

-r\
trí foi i¡ll € 9,ro^r,nr)> wr.t_yler;
"
"I--' "¡up i¡,, (¡,, :eú E i\r..
r!
-l .=, _ * (see figure
f,iiherr;vise ,L
I
i 5 .T |.

h"igure 5.1 IJegenerate case 2 f?igure -5.-5 l)egenerate r:ase 3 lThe stanilard case I is iilustLated in figilres 5"3 ar:r:i ji.j. Ihc, elegenerat* case
? !s illustrated in figure 5.,{.)
a

Froof, This proposlt.ic*n mereiy as$erts íilüt a ¡reri*ct equilibriurn o{rtcor. ,

c¿¡r:e 1 is de¡lt with b1' obs*rving that any action b¡r player I ai time rr_.i y is eitherilchreved via an acceptance at time /e-1 in v,,irirh ,;ese
r';hich le:¡ds to an outnnme,l',,vith.y, {/ cannot be i:r equilibrium.'liie reast"¡n .i,r { r b3,
proposition i oL else is achieved via a rejection at tilrie f4 _r i* which :ase
ir. rlrat u'"-4¡,_",.¿n be found wiih wrlj¡r and !r2)M. In equilibrium. { l.
.r'1
r'{lver I v,iil i;c"'pi $'at time f¡-., anc }rence player I wouid inrprove his
pa','cfi by prrpcsing w at tinre fp.-,. case 2 is sirnilar in tirat player 2 will The ileed to deal adecluately with possible degenerate cases coni¡riirares
aLcrjF¡i an), proposal * tFlr,, the stai**rents r¡f the precerling proposition,s 'nut they are quite e*sy f.i., *s¡
in ¡rractii'*. irr our applications we shall ha"¡e availabie an inclucti*n hyporhesir
f'r*posltion 2. lf, in propositicn I, it is known that .ir ) a fc;r all z. then / whir":h elseits thrat all perfect equilibrium Lrütcornes z in a
rna5, bi: rei:laced by rnax {a. l} ligure 5.6). "cühgame which
{see col.l1r"ni:irci]s et iime f* satisfy an inequality of the lornl b¡rr{ e { ll}.rr ivhijie
 Perl¿:c{ equilibría fu bargainittg ¡n¿¡¿lt'ls !i
EJ Perj"ect e,¡uilibria in bary*ining rnt¡dels

xt--A

xt:M

xz:m

F-ígure 5.8 Standard casq'

¡:'¡gltvs -5. 7 Degenerate case 3.

b¡ and S¡ are points in [--*. +m)?. We then use proposili{]ns 2 ¿¡{ -1 to

!rornputr b¡,1 and B¡-, wiih the property that
br-,(Y(Bt-r
for all perfect equilibrium outco¡Ies y in a subgalle tl'hich cofilmeÍ!{:ljs
tiiire /¡.-1.

4 SFIRiNKXNG CAK}i ASSUMPTIO}'¡

Tr: avoid obscuring ihe sinrplicity of the technic¡ue with te*h¡icalities, we

F'igvre -5.9 De gen*rat€ case' Í"i.gure 5.I0 Dege n*rat* üasÉ

impose a further condition before continuing the discussion. This condition

consists ol'the sl¡rú¡king cake assutntltion that the Paret<¡ lrontier rlllf] u
fi
lie ill the sert
Proposition 4' Aii perlect equiiibriurn outcornes
ioincide¡ u'ith th¿i ol-:.tl when s ) r.
Liter 1n the ehapt*L we shali return t() lhe querstion ol horv the lllcthr¡d
ap¡:iies wh,en the cake is not steadily shrinking in the conterxt ols'¡me speci{ie: o-; n=l En
r'xamples.
'l'lie advantage ol introducing the shrinking cake assumptiiln at tliis sta.ge is where f,, is constructed as indicated in f igui:e-' 5'8-5'i0'
that it berornes possible tr¡ describe the construction ol ther sets '[',, which hoof'. ft is only necessary to observe ¡irat we proceed
by induction bcp'itt-
alrpear in rhe loliowing proposition by rlteens ol'a simple tigure. Figure 5.8
nirrgwiththeobservalion'to..allperiectequilibriunroL|tcomesins*b¡.atrtes
indicates the general situation. Figures 5.9 and 5.10 indicate degenerate cases'
 lW
'1,i!!;

PerJect equilibría in bargailüng models 85

Pcr.f'eci equilibtia in bargaíning motlels

possibilities
at time ¡n-.2

m
--N --
pass
possibilities \-
at t¡me f"-1 \.?

,%
:l !;. pctsstnilitres
'.:.'.; attin¡e
ir/V
t^ t;///,

Figure 5.1 )
xoz r{"
,j!'!n.r11.rencing at time in lie in the union of the sets ::Xi,", with ru P n' Figure
i.1 1 iilustratcs tire firsl. twL\ steps. ¡
rE-\
-/^¿
proposition 5. ,Any poinr in the set.t of propositian,4 is a peiler:t cquiii-
tl ri u nl o utcome .
/\/tx \

f,}"r.,r.{ We begin b1, observing that any point x0 which is Pareto-optlmal

i¡r,t n is a perlect equilibrium outcome provided that there exists ir seqlifírLr*
(tr,,: ¿s illL¡sl-rateti ir.r figure 5.12 .¿.ith xtt Pareto-optimal irr ;tlrn ior each
. _ .-,,
¿!
r
L - r.
1
-:. . . . .

The broken arrows indicate the responses planned by player I at ti.me 0 %*3
rl equilibriunl. Ft.tr evmpie , piayer 2 plans to accept a proposal ci'y* ot titne
,.1 but. if h,e i'inris hi¡¡isEif at ti¡ne l¡ in the position of having refused thc f'r¡urc -i. l?a tn,i b

proi;osal y, to continue r';ith the prcpcsai x1.

-- ft 1 a
Assuming similar history"independent pians at evcrli tiínc ¡n ti? -J,',"¡'''J" re¡ecterl. Fi¡¡Lrr* 5.i4 illustratcs en apprr:priatc perfelt equiiibriurn ir-' tli*
'l'he'eriticatr
,...'e r.¡btaiu a per-fect equilibrium which yields the cutcome x0' uasr r?::2. Nr:{e that Xt is a pcriect equilibrlurn oütcl}lrll3 in a subganrr
pirr" isee ligure 5.i 2-bj is inelicated with a broken line' comffrn,.iing al tirne f1 and {¡? ¡.1.j x2 aie ;rer{'ect ei¿l:ilibri,*nr outcorncs lfl r
Thir ur¡;u**urt justifies the assertion that every Pareto4ptlmal p-oint cl subgamr": co;r'ime ncing at time f.'.
,f i,r a pe 11?cl tquliibriuru outcolne. Co¡isider ner^t a poiirt fro e ¿' n fi v"liir:ir' .A.s an e.rainple, cc¡nsicii:l rhe "iírerj cc¡sts'r'nr:r:iel gileu by idubinst¿;in rn
is nai Farcto-{rprinrai in --.f6. Figr:re 5.13 indicates appropriate perfect equili- "haptirr .I:Ieir: tn:
--¿ ilt {ra.'0. l,:, . }lt:¡';r fixc':i valLre oi'¡ and
brium respo.,s.is fo, pla;--er 2 giv*n that piayer 1's perfect equiiibrium initial ':Y'n, -* {,(xr -'- c 1tt! -- c2 r1Í i : x i } 0, x2 } Ü, x ¡ * x¡ = i i.
taken to bre ¡ri:rf"ect "xi,
I,r;:,:,i.rusal is {0. ldote that X1 anr:l xr in figure 5.13 may be .tilir;k
üne r.ni¡¡ht ol'two ag*nts. v,,itii r-i1iiil'*s iirea¡ in floney. who barL,,,i)
eüüilibrítii-ii out{:tJfi¡es in a sr-rbgame which commences at tirne /1 bv the ¡ cu:r- tr,i
over now tr: siiare a doilar. l)ela,r,'i$¡; il!:reerneni tly'iinre );- gcnerates
*r g.ul-l:cnt given above.
c¡I to play¡rr i (i: l, 2). Propositir.--nr 4 and 5 ari'irpplle'.1 geoinetricalir,'ir;
lirere nrains the q*estion of points tn e E ñ:l'¡n. Any su,-ir autcorne
re
ligure 5.1 5.
nra,, be achierrd vra a perfect equilibriurn in which thé lifst n propt',sals are
 Perfect eqaitibria in bargetuing models 87
86 Fer.!'ect e,¡uill'ónb in bargaining models

_1

':!,,1;
iii,l
':'íl
::)a
.'N
i+, ¡U--¡2
(2 -- sr |
I

.i{,i ,,.
-l X] I

::!;' v'>Xll
a
tt ,- ¿) I
!1 --!i I

f r':'
*,. *j! I

vr>x?t)

figurc 5..13
.:

or'¡tconle v¡liich ls :
Tilirs. rviren r,1<1 r, ;. ihe¡: is a utlique perfect equilibrium
bv an ac"'eptance ¡i the initial proposal. Player 1 receives a payoff

I
3g|¡!e\r,d
oilrlirewholecal.e}ancpiay*r]¡eceivesapayoffof0.Whencl)c2.tirere
i,{ a[:ein a r.rnique perfect equilibriun1 outcome which is achieved by an accept-
un.*ot.thr'i¡iitialproposal,P1ayeri.receivesc2tandplayer2receives1'_.c2,t.
'fhe case {'t: c:: c is more interesting in that it;xhibits multiple perfect "/Y
of the initial 'i:' E
equilibrja" "coit.]c r.'wirich are ouly achieved after a rejection t
the that smali pertur- x2
pr,.')p.,-,,ei.'rhe situation, hor,,,ever, is 'unstable'in sense
in tl.re paremetefs ot the problem (i.e. the intervention of a'trerntrling
barioni
irregularities
irarrd'l lend to elirnrnate the rnultipl¡city problem. For exarnple,
will rypicaliy lead to a degenerate situati¡¡n si¡nilar to ?4^
-qa
in rhc sequence
"(In)
thaiC}btnitie(1rvhenunitcostsareriflequal..A,moresignificantperturbaric;liis Fíguw -5.14
pe rhai,:' ir¡ ¿lio'r,v ¿ üertain fleasure of risk aversion
by taking

.L'n, : : n'. xz'l t'¡c,¡.t : 0(x r -t- ¡¡¡: r¡)] but since $ is rtrictly conc¿ve, [his can hold fc¡r at most one v¿lue of
X" !\'c
conclude t{rat t'or al1 @ satisfyíng our ccnelitions, tlrc¡e iri a itnir¿ut' Periecl
ri,ltt'¡e orlÜ.1i*[0' 1] rs a continuous, decreasing, strictly coocave slrr1ec-
d in figure 5'16 equilibriurii trutcorne.
tir-rn- i;;r a Point to s¿r.isij ihe statiixarity condition indicate
Nate l. Continuing the discussion <ll the previous paragraph' it ma'r
be
it is ntiessar5 that
noted that wtren / + 0 +, we afe led to the unique point orr '',-lo'at '*'hii:tr ¿
n{-:r'i--sQ:-" Ct
'supp<lrting 1i¡re' has slope -c'2/c1. This point rnay be thought.cf a" an
-(tt
 ,.; e,;f¿{ilremb in baryaining nru¿LU
3l aJ<a-. *. Perfect equilibría in
baryaining mr¡dels
89

tX - 2ctt,y*2cztl

(bl cr>cz ),=lo(x!

Y+czt= c(x+ ¿.,¡¡

it$\\i(" Figure -\.16

.\N*u.\\\ ::{,p[i1'fi
unrts !}Í.,1,
;dentif;able
ll¡;n., "' " n

D l,
i,
slope - 1

F ígure l) .1 T

r,e s)7) rhe ,ac, r,ra, u,i,i,y

ü:,J:'J.f;¡;l;J:1,.fl;*;,?ii::',jl
be thoughtrr io..t*¿ at **¡.
'status quo'altlrough
this may
"f {*-*,
Nr'¡te 2' trf ;rirn, is modifreci
so ihat rree crisposar
tress is lost in ihe is adr.nitfcd, th*n
receives the whole
ca$e
:r
<", 1.ttirn,,ir; ioi*n*, uriique"
cr ) cai, player I
cake bu1 pLy*, z ;;;';r*,"* still
f.-igure 5.1 5 anyrhing hcrwcen
0 arti
;'a;; *i ff iT Ti; iiiliil:*, ,T*:.
rep,a ci ns rhe bau ndary
asyrTlnleirja .Na&r,ba¡s
u,,ir (,' ü;iri', lf rhe players have erily flnifv casl "
I i", ,lfii,'i'":,,;:tÍ,,1n|; 1:::*.rion 7) i,r rhe :ase when . !:* -1.when
Itegotiate these ar. .rn",,"r"i ';::.-:i",rese.rves and r'an no i*'rgrr
;.:;;:".:'?n::"i.;-;::l' r"'i ''lri,,'i;;;;,",*"n'unit oruriritl r'', pi¿vs¡ ''o¿¡n*¿. ,n. ,oo,"i,^i: ;#:::'i#;"'liJ,lllr;X'*1,::.,;;,; i'".,_l_ '1" o_
-'; ;il ff ,:',, [,' ffii
[ :t,.:ll
1., -"1.j,: T ]; fh]É : i.;;'T:i'
;'Ii:;:;;::,'i j'',-,'::,' .' *,, -';;; lT ::q't'i:s
:
i" va'a'¡,ie,,ndcr
+ L!l whcre 6 VANISHINC CA}íES
I ,equi.t"g
a.rioo'
i"l.tr"'tx2 '4 - 0 and
irlce undgr transfr-rrnrations Perhlfs tlie uosf interesting
c¡f_
in which the sei 91, shrinks special case o1' the n¡c¡del of ,*.tu,n 4 is th¿t
to a single poinl as /+ *m.
," s;,r¡rl,rn ,,,,,
q0 Perfect etluilibriü in buryaining madels I !
Pcr.í(cf eqnrlrlnk in bargaining rlr:u:fe Is

It lollows that a sullicient co¡lditiolr f<lr the existenct ul'a urlique peri'*;t
cquiiibrium outcome is the divergcilce ol the series
( Prn r/:r-r-\
S- logl--
¿ ' -- t'
n.'t \Pz¡-t Qz,r-2/
Lqually, it is clear that ii this series eonverges then nirrhiplc perfect equili-
will occur whre n odd tcrillsGf the sequence
briuni outcomes exist. Convergence
\p,r) are sulficicntly close to the subscquent everl terms atld, si¡nultaneousll'.
euen te¡ms of the sequ*ncs {qr¡) are str{ficiently close to tlrt subsequeni
odd

lernls. F-igure 5.1 9 indicates án appropriatc configuration"

.t ,,
7 I:IXII] DISCOUNl RA"I'ES
Figure 5.1 8
Tire most important special case of a 'vanishing cake' i$ ihat in which
the

phvers díscount fhtu¡:e cr:nsurnption at firr:d rates 61an<1 ü2 l,wtrrrre 0<ói< 1

anC 0 ( Ez <l l ). Thus

:iituation ri,e shall alwavs assuffe that the sets "'fr a1l lie in the non-negative
Lrrthani and lhat the point to whicli tire-v shrink is ü" As figure 5.i8 sr.rggests,
J - {(trói"' t''ótt') :xLJ'{o's'
rhe typiial iesuli is thai. ille sel ¿-' .rf pe:fect eiluitribriulll outcomes reduces Rubi¡stein ui c:hapter .l
"'
showertr tilc t¡liste¡lce of a uniqu* p*rli:ct eqr.rilibrr'".i
to a single poinr. írutcome rvtr*n jfoi¡ coirve.t and ¡,i "' rií (tt :
{:1" 1, "'}'

llorvevei. a itniqut peifect equili.blii.lm outúon]e is nct gutrfanteed urlder A si¡rple ¡¡oriilication oi th*:rrgunreilt ot ¡;ec:tit.¡ri 6 shcvls 1i¡at the sarne
these circumstan,-res evefl rihen the refs.tlt aIe line Segments.'lo sec thjs, we result hcilCs in tl'rr oase w-hcn
,]onsider thc tase in whicii

rN.r,, - l.x : ri ) 0,x2 20 andpr,t.xr'l ¿l*txu = ii fi

rvircr* ip,") arid i(Jn) are i.lecreasing sequences of positlve tertls. Referring to
ligure 5.2tJ. we have Lhat

P rt''i Q
xn.¿ ..),r+¿:...:.._t
- 'a 't t-rf _),f I
l) nQ not

and hence

pa 4t tlln*r\ , --rn*: ..zn.tz

r --0 ..0
lrt--_rlt
I
{
,-L-_,_-
-
!',2 ___lt_._--
Pz" \{at
jtxi"- -.r r""
\0, ,,, Pznrt/ \4o 4z ?zn /

1t
/eo . !): Pzn\1Qt 4t 4zr*r\
pznnt/ti\Qo
---lI
\irr ltt -
4a Qz,, /

tr __ , 4z
/ n^ Pt, ___
Prn.z\{q1 4:r,oi\
:Po{: It
\¡;r l]1 P2¡"1/ \q6 Qz Pvn t' írig,t *e 5 .1 9
 ql Perfeu equiiibria in baryaining models
Perlbet equilibria in baryaining mctdels
q'E

( z':lt )
< exr (,*.' to t}
{A o|o
: * 0 as ¡r -+ @.
exp {Ar2n*z}

ivhcre A : max {log 6¡, log 62} ( 0"

4 It is a simpre nratter to tibtain a formLrla

ror the first cr¡o¡.ir{rrrrtc
.rf^Nyte
ol the unique perfect equilibrium outrjome in the example of s*r1¡iri,
x¡:)l tassuming that the appropriate ser.ies diverges). We liave that
¡.

, =-Qo*Q
Po po Qt.pt,_ 4t pz'.-'*:.itQ*-
.'Ji r)+ -' _ .-- (qz-- qil -¡,t;a
1 ".-'-"' Qt pq
,¡,, ,
Qo PtQo4z ptQoptQztl q
I

ln the case when p, :

6'i, an: áf and {n: t!, this reduces to a result i,¡¡,.,,.
l
L* late d by Rubinstein in chapter j: nantelv
Pn-rz

x 1= pn *2(x2I x1 =p^r r {x2) x1=qn{x2!

.'?: i-6,
| -,, t)lo )
F-igure 5.20

u"here ril:[0.ii*lc.ij as a 8 SMAT,I- T1N,{t' IN'r,r[1..VALS

c'ntinuous, derreasirrg srrictly concavc
tion which is diflerentiablg on (0, surjcc.
l) anel (r,r) satisfies /,, _r -l- * as + F.
=- Jfn¿¡.116 -tn) and apply rhi'Cauuhl, mean ,,alrie
¡? Vile various criticisnls are possible of Idubrnslei*-type nrodels even in tlresd,.",,,.u
;j::.: ?j:,)
..bur! _,,¿v,
theorcm in in which they prorJuce a unique perf*cr *quiiibrlu'n out.or.F. onc c¡it¡, ¡",,,
\le obtain thaf is that the models fav'ur the pl:rydr wíth the upi:ortunity to make rl¡c
ir¡tr
proposal and the model leaves tli{r *rcch¡nism by meals ol which
¡}iai,,., ,
U,l lU* dn*r{,tf)
-d,*-10\l _ój,r,(z¡) gair:s this advautage unexplainectr. A sec,:ncl criti¡.:isrn is the rigidrt¡; *i r¡,,
e n"t / en
O"&r) * Qn(_tl) A;{17) tinretable tbr making proposais: what constrains the players to Iht" r¡.,-r:,.¡
ilhere 4 lies between x,| and y!. this fimetable?
But Both criticisrns lose their forr:e when the ine-¡del is ap¡rlied in the r::as,, ,,¡
tn vanishing small tinre perioels betwesn ¡rruporals. Begínning rvith rlr* *,.,",.¡
Iüa9 /0,1r,"r- ; tjt'rr76;tn,t¡ | /g,\fn+r-4,
I Q',a) l-\tl
|_
i;ffii'(;/ criticism, suppose that no constrainrs rxil¡i on the tinietabhng of
¡rrri¡x.,:r,..
Then. after rejecting a propornl. * playcr wiil typically wish to inrriidu,...
,.
berau-te ú'decreases. (lrrcte that counterproposal at the eariie st p<irsible rnürlieilf . ln s*pport of thís asre rr,,.
differeirtiabiiity can bc ttrisp*nseci lvith
'rrrurirenr a"t the in the
expense or'scnre extra steps rro.*.iinfirl"'*r,,""
) we note that the analysis olsection 4 würks equally well whcn the pl*yirrr .;..
with lhc' e stinlate l xln*2 * ),1"" I < ó a 0", not necessariiv altcrr¡ate aE proposcriq (with the ¿ibvious lu*cj¡;i;aiii-r:¡¡l ;.
1rr*r, o,. orc lr¿ to the inequality
particular, it is never possible in i.hr: cüsr; r¿'1.:en ¿ unique perfeci equrlii:'r:.
( r¡rltztt*t-tzrl
-
' -*l'::\"-'01!=1u-"
l¡Y outcorne exists that a piayer's [eri,'ct cqui{ibriunr strateg}.wili icqLr*,.
'r,?l \4,/ \ili t
;j 6tzn*2
passirig tire opportilnity fr:r rnalce ¿ brrj. lt f-lrerefcr*;Es*nrs reasoncbld rr¡ ,,
a Rubinstein-type rnodel in wh;i:h the intervals between succcssivc proi:l1r;,
{n ', ar.^ vanishingiy srnall as a paradigrn Íbr th* case in whicfr the piayt:rl iir,. ,,
**Pliogó1 (tzknz r2k,,) L
( .f
¡,--c lrg12 f (:t;.-' -tt* )J' fbrrnaiii¡ constraineci by an exoge:ruusly cletermined ti¡net'abie. Th." ur,,
k.o such a moijel has two subsidiary nle¡its of'which the most intFlrrlni !! r .
 i,&r I
+¡i
o j F¡:r"/i¿:l eq;*^{libria in baryoíning t?¡r:}dels
'l!
'¡.'l,ji'*
PerJ'ect equílibria in haryainiu6 tl'¡r)d(:ls +'i

i,i i io justify li"i{i ai"lriti-r¡::;i ';r*d

tir. :J',:;-,1-ig'.: iLr ¡ri¿1'¡¡ I in ireing the tirst to m¿¡ke a pru¡lrlsal dis*ppears in i'ornr¿i trcarrlrent of'the idealiz.etioirs reqttirctl "
I ,'Á

in set:ticrr t woulcl bc usei'ul together with a con.]parisÜtr '';r'11'¡ ';;¡*tIV

tii,r ii::rir ;s tli* tiltlr in¡¿rvai "tetween proposals tends to zcro. lJotil criiicislns r.¡
authors whü ar i ' : ji i :" \rillL'
iltr--:litr)r;: ri tilc llfad of thi.s sect¡On are therel-cre dcalt with by the sanrt ,urrr,,,tpri.-,,0 witi: those nlade b-Y t)ther
r\.:-,..1i.;,:. l-i¡i. scc*il¡"i acil'afitage is that the results of- iLubinstein-type LiLrt)clusiorl .

r.::i;lilii:s in thc iinlitúrg case catl be described lr:r a wide variety ol cases as ;\''(¡It,, ó. K¿sulis sin¡iier lrari;;¡:;il ':l \{'r\!)r}
¡(] that rnentioned in the llnal
g nray lrc Obtained under tnore general conditions by rcsurt]j.'¡ i+ !il" r'r''
rr{
ll\,, r)rrri:ii]; \ash rlargaining sillutions {ser' Roth I979¡'
,lrt jr,rnrmctii.: hash bargainiitg soh¡tio¡l for a corlt¡:ract, cOnvcx feasible ihc c¡lcuit.ls. As ati elr-at'ple , wi considet the case in whru' '{,1 i"'
ilri r:trit

s,'i ".i iiiiii sii:?l.ts quo poin¡ fie ;}. ts olrtained bi'linding thc point o at successi!:e inten'aj'; l{;r:'lli¡ 1"!i\i1-
sin-)plc'r 3nd the tinte intervals bet\.vcetl
rr ir:¡h .':; -r:;' t:, nra.ritrii¿¿d on :.li {see ligurc 5 '?.1 ). 1\'e cali the positive para- intcivals is unifornl r't't: i.:i¡il' ! ' '1"'t*
ingir- ,nr*tt t¡ul the iength 'ot
lit.rii..rs ;,:itri i1 llre 'b:rgainieg pgwers'i-t¡l'plalre rs I and 2 iespei:tivciy. Only
'l'the proposal b\ 2 llr,rr; :r,: rr.:;ii.,r ,r.L
rtrai" :,i tiute /, tiie inierval separating a
requirrng lhat r1 'I'rr: 1'
il¡ succcssllr" lir:i;':i;'!.:i' r'r }
t:ri:: r';rlr,'1s siqitif icafil hut rn't'nortnali¿* proposal by I is ir {r) of thc inte rval separatinB
ir ':i::tter .i i'.,,: shcived thst, in the c¡sr rvhen -'t s is convcx, rr? : t¡r ixncl i¡,*,.,ttrr, proposal iln ihe'criticai.play'(sce figurc 5'2) at l.:':.: I
oni; 'r"r:l¡
tlr,: ¡lar,:¡s discoLlt:t i,-¡ii¡r* cr¡nsumption using f ileci discourrt ratcs ár arrd f,, (Ez/6r)%rw(r)andrt'{/}isthest¡lril ::1',{:1 !l'ri !1''r:
¡;laver --".1,i¡)where ),(t)=
{sc.r'lire i-irsr p3¡1¡1¡¡p1., of section 7)" then the r-irlique pertcr;t equiiibriurl diitcrr- irt ir.ri eqllati0tl
iLii;:r.l!¡e -oitvr.ritr.! as I+ü¿ to the asylnmelíi. Nurh b::rgairin¡¡ soliit!on : u{tt{61ñ2}v" ;'"'
It¡r . l oi', i¡ii slatu¡ {,.rc S ¿nitr "?,'argaining powers':
n''{r} 1 ir'{¡) ll ' ¿¿(/)) log(ói/6r)
"¡
rvhi cl't s¡ i isli cs t hc iio.rn d:; rv L:ondit ion
log6¡ log {i 1

tl-- - lugó1 * lu¡ó2 11,i¡i+Ü ¡:i 1+*x.

l,-'¡',1 ,I,1ro¿t
l;:l :.
-irargairritig .;1,,r: tl;,ic¡ue pcri.cct elquilii:riurn ()i-ltf¡ij.ji: itt;:gtt:,.;li';iil.l .]
.\-r.;¡"{, -i. j ltc I'esLlit .unüernhlg asymrnetric Nasil sr.-ititlurrs has lrt ¡rllLli;itiitt.
b,¡,::: r;'0rai¡.e { iiiiependcnt}1' b5' hlacl.ennan (19[]2 ] :'rr,l Mou]irr (tr 9E2 i untLer 1'{0J. lilr e¿sc *il}.-,f {¡>t}'} oi u'if.rn: ti¡ittr!nt*rralr,!tir}ilr.,,,1;,trr'
v ri'i.lrts l'ri pothescs. Ii rvas also derived lrom r.::lr:¡tsiir1r.' Cilter,:¡;i ¡llt¡deili ilt
sr¡ i"'cd.

.li:¡rer I ¿ncl in Binmore 11q81). Tlie resul¡ is alst-r stron¡ly r*ir1i:ri tc

iiars;tir1i': rationili;,.aii,-'li oi Zeutl"Len's Principie {liarsanyi l9i7) ¿¡liti lo rhr
¡¡:: ,,:-, i,,,.,ilt oi sisllt)l (1S6.1 ) and Foldes (19ó"1 l. Therc is perhal-'s ruolr 9 [-llAiii'L' l'ÍOY!:S lN ltl]lli\S fl''llr'l-\ Pi \' -¡i': i "
i !ri :i tr,:1r.:í ;.1;3s;i¡1¡, all ii¡eri{' ;lif{e lrnl sirands tL-rg.tlrer t"ith ¡n üiri:l i:uiú-
iir,)i, ¡,ri rjr¿ tvrlik of stáhj {1q?:), F{icks (i95-,1 ) alrd irtl'iers. In 1.rarticr.ii.rr, a aithrrrr;r!' :1"""'
Thl :ir*uilr*iit oi's¡c11oir -1 r*lLrai¡r:; vajicl in p:ltlLlFlr rl¡i'
illllr:tii¡;;rd itrlr¡ ,;"i j{: líi i r

c¡.ie ¡-1" iir ilet¡:l rvhcn i.hilil{-:(r iili)Yes aIe

ilr '':r
ir'i:llilillg til; perlcci iillulilll!ir)ll:t:s'rl:r¡';irrl)"1'ilr'r'"'ir"lrt'\
if ii it'iil :li]$f,csl thetnsei'¡*s :

-tr'ilc tlte *"rul 1r:rqr "; ::

¿ase in which 1l:e piavers ilrri illiolvfd
l-ile i;":si: in v"'iri';h. ai earlil tiiilr l¡1 {ri '" il"
i' i ' I : i'"r r-'
asyrnrneiiÍr !"lash . ¡,.,ti
h)'¿, t.llrdt'll d."itr':
bargaining t
'' ' '

solutir¡rr itrj rji.]sr: iri nliicii thc iiillrl i¡rit:iv!:i 'i:'Jilldll¡!i

I
l ltc :t,t;o I ls a ralldo¡rl vaf i;¡blc
*
lt, ,irr: qi rlls: !i tl'rll <ali:i úr'rll v' tlll r:''l
:

i
lir'{*líritt}ii i;'"'rr i'-.'
if irr tirt cnrtitpit ,lli ucciil'"' i Ilr rillii:h
':

-..- v.'l v-.'ll --¡ ).!+;! 1i' 1..

i:r ';iiti,r. rvc aliow all timl in:el'r'ills scp¿¡r3!jn lltr!íi
nrlh;rr¡t:"1::t''"u,t.,,"''
i_. ici,:,,1r,::iiiy tlislriir¡rcci lar!(lÜlll v¡¡i¿bles
\1*f,tl ll:"r r' rt t

o irrü ll!¿ :ll!ll¡'.' as il ¡he time iuterv¿is

t:igurt -i.-'1
ritpe nils oti t1;i-) "lii-if¿iity" ill ih* u'akr'
 P e rf'e t c t¡ u í li b r ia i n ls *rg t;,ia itt g ¡¡¡ ¿;¿t'¿'li
t:* !'erlcc{ quilibri*im $'*r¡cirlixg ¡¡¡¡;i'i¡ii
<:

l\re rjis*uss íi-ii; :ec*ttd ca¡* i¡r s*ctlot: tü belcw *¡r'J cs:¡t¡i''t;itt i¡* ille ilrs:
¡;cssii;ilities at
case ill s*fiion I :" ?ime t-.- 1 ;ffe,. 1
chssen as pfúDoser
aln- i1/+6d- ¡l! possihiiitits at
i) ItANnost s!'I-l'if..]Tiii:d Llt: t ¡10Pc)58 ItS
r:i
I :!¡r tlíne t...1 ¿flÉ-r ?
r c,hes*n á5 tlr*Fosel
is mociflt'l sr] thal"at
ln tiiis sectron we suppsse ll¡at the rn*¿i*i i¡f secti¿:r¡ 2 pcs$¡biiiti€$
tifie
i:tt
a c}ranc* r¡love' Fr:c tn-.r Séf6re
time Ín {ru = 0, 1,l'."'}' ilre ¡:r*poser -chose¡r
is '*1i'
prcÍ)c?$6r ch*sen.
sh:inking *ake ass*'u:F;ii*n af :eetiou 4
,irno"*iry we sh¿:il i:ontillue ir: r¡se t11*
the $*trÍt-l a¡e ali ;*iil'*:. {si:a lecticÉ ii¡
-oJ',* v¡lih ihe asl;dtltsiia¡i thret
t*geirr*r
siiuatian provided
propcsiiicns oi sccrion 3 reln¿in ':alid in ihis sev.'

ti:rat|h*:u"bgamecommencingattini*liís¡'jiide.rl**t1tcL:ethai*}ii'trr
cl-rt,.|l,¡E i:r.fbie tlle rlünce move
at tin:e l¡ h¿s ¿i;''i¡e¡i 3 prolloser whil-* t1'*
sub¡.::inr*crrniin*tteinp.eit,rfi-lsJ¿--,isu*cerE{üü.iitc]'¡etltatv¡i"richobiair'i*
alirrtl:echa¡'¡c*1trúveattir*r;Íriha:;chosr:¡taptcFo$er'Thek:liu''ring
t}te ¡'e +" cir;unlstanc;s cc;;$rd*t4-1i!
lesLllt s,-¡'n-otitutel lr¡¡ íirc:li]5it1*i1 4 un'li:¡
3le inil*peniienl'
i,r tliis sert¡i,rn prot'!{ie':} '¡}ral aii ciiant* i:-iov*s
p*ifeci riiuilibriur::i 0utcoi^nÚ':: l+r Semrs +f iiic t¡'¡t
for*positicn 6" '{ii.{he Fíg*re 5.23
ciescri'ned silGrre ii* i::l set

¿i= ñ 9*
n=l

iii liEil;* 5"?-: '1:rd {r¡ á:rr'1 q¡ arr ihe

rvh*re En is cc:?stfticte{i as lrtdicated
,**p*,trlo*picbai-tilitie.eilutpiayersiani?ar*;:itcst:r¡41;pli-ipü3erí'iÍiri'o ¡
t ¡tF;c + 4r
: 11" ¡t,,= pryta*r_,f

!:ig*rt .5.24

,}aoj. T'iie 1';{:,}l :,r.v cf ilr* i;i¡Jliciicrl; prt-rcess i; icldii-:ateC ii-i iiüi:!r :".:1'l'

i'* Lic c:;1 *'i1i¿ii:P'r i* pr*vide a lut¡$x.ili¡te tcr pr*¡:r'rsii!*r¡ 5 -bur it wiil be
j."'!;:i:: ii"rri a;:i' ;r.;tiÍiguiati:,1 sf ti"¡* typu sli.:wli iri i:lg'*;ü 5.1'i rtlil $ui:íj¡'if1
tr :::;1 1.,:i eql.;tiii,;: :,-il'l i.
{"igr;te -\"}2
 Perfeü equilibria in bwgaínüry madels 99
rlE P\:rl'atÍ ryuilibria in bargaining nzadels
pt! - ,lL)
.=
i 1 l'lXI:i; DIS(IOI-JNT RATES lvlTll RANDOM PROI'OSURS
I -(Áú+siii:pll
when ¡r: I the game is symm*tric ellc€pt in so far
as the dis-
In particular,
,\s ;:rr e:ranrg'rie we ¡eturn to tl¡e case in which a cake shrirtks accr-rrding to count rates are concerned, and we obtain
i-rrier j:ic,.'iunt rares as rjes:ribed in sectio¡r 7. To simplify the calculalions, we
l'oiiov. Rr¡binstelninirrnsideringonlythecaseinwhichtn:ttt(rr:0.1,2"...)
i - et
aircl 2* 61 --6i
.lo= ix:.u¡)0, x2)>0 artd *'.1+xr:1i- Tire perfect equilibrium outcol.lre r,ve have caiculrted alrove is Farcto-
sirilple,set' Irr the
lnstead ui assunilne tiial the proposer et tinre f, is pre-determincd as in efficient in i'to bui this is only because:u"6 is a particularly
scclir''ir I. u'e assurn: tlint player I is chosen at l.imes tz, \n :0, l, :, " ..) generalcase,forexampleiff,}oisstrictlyconvex'theunir¡ueperfecttquili.
f,rium outcome will not be Pareto-efficient in J:o. This deticiency
disappears
t'itli p¡r,.babilily ¡"', lnd that player 2 is cho-sen at tinles tz,,*i {n = 0. 1, 2, . . .) to those in
rvhen we allow r + 0 * and provides an exlra reason
cansidered
r','ith ¡::r;babilit1' r¡1{r;¡'f p:: l, qt+ 4z:1},Ail chance nroves are assumed
section 8 for considering thiilimiting case. What is ¡nore"
th* atlove calcula-
i,r¡l¡n¡. i.,n,
ailequate to trOcate the unique perfect eqt-illibriurn outcr:me in lhe
Corre¡gcri;e issue-r are nluch as in section 7 and wc obttlin the e.xistence tions are
of section l)
of a uul¡ur ir;'rieci ;quilibrium outcome which can bc computed using the liniiting case lirr aily ü011vcx set i.L.o (subject to the conditions
also"
stetian?.flt\ .cr-isideietions i¡rilicated in figure 5.15. since the niethod used in chapter 4 wc¡rl;s lrere
We obtain ttrrat, if 1.he proposeret time fn is play'er I wilh probabtiity ¡t
We ¿rrtain trliat
perfect *qrrili-
and the time interval ¡r ls sufficientl-v s*ral1. then ihe uliique
(l - t;)iq,(ó{p' + E{p2l + p1l brium ontcome is approxirnatelv the asymrnetric l'iash bargaining sotrution i"*r
-
o-
I -1ül¿r,*¡1pr)(iilq' tslqr) :fu wlth stattls cuo 0 calculatr':d raitl; 'bargaining porvers'

witli ¡': j o. lt n:ay bc ch*ck;ed that this yie1c1:; the sanle restilt as obtained _ ,--:,-- 2" -:'
p 1og r! ¡" lo¡¡ 61

b1 l{Lrbinstelll iri the rase r : t, pr =' 1 a¡ci q2 : I (see nole 4). 'rT¡:----- ^-. T.----_"
plogl2+(1 *¡;)1c962
p lugé2+(1 --¡r)log8l'
Thr' ntost i111Él!e:l1rÉ ':¡se is when uiayer i is allval's selet:ted ilith lrrob"
airilrt¡ ¡ {i.r'. rrr : 4 t :p}. Thcn NoteT'ltisrratrlieltoas}iwl"rar"trappenswh*nthernterlalsbetrv*t:tt
süccessive propos¿ls are vanishirl¡:iy smail and the
probability *|¡ria¡"tl !
bl atü!
being seii:cted at time t is plt|' The nu*iLrersabo"'e
is then repl$t:*ti

where a(r ) satisfies the differential equation

i a =. la,l"ll .= pú1 + p2x? ü'(/) -r- p(r) at) ,-t

il)"- fir;p(ii laesI
l b: + QzVt
I

C=. a,62211\
t 12 I'!lXf':íl STRA T E{l1ll5

TliepropositionsoJ.sectit¡n3renr¿inr,ajitil,',l.ienrnir¡js1¡a1*fi;q;;l*¡*il'.:1."']
js neccssonu' 16 tt-:¡rilti'r '{u ?'t t!rr 1'¡ri:i"
er,cept that in proposition 1 it ' {"!¡ir 't Iiir"
tliv :'r'tl i ;i1i
liontier of the ci,¡nvc" itu¡i of "'Ú,*-n' fhrrs i{ aii '
dvt'li Ii r¡llrr''i r'1r3lrNl¡{:\ 'tlt'
ló1?¡,0) (ó1t,0) characterization ol sectior'¡ + "i'iiinu i*tarl
I;'ígure -j irermitted.
 lOtl Perject e¿.s¿ri¡ómtr {ü hargaining models PerJbet equilibria in harguining ¡r¡oti*ls t01

I3 }i{fN"SHfi,INKtNC CAKES

!--ossible perfr:ct equi I i bnu rn

ln this sectir:r no longe:.ad.mit the possibilitv of chance rnovesin order ¡r¡
rve outcürnes in suLlganros
coü.entrartr on rhe situ¡tio¡r when the shrinking cake assurnption o{'secticn 4 conr*rencing at time tr
is abanililned.
No*e ol'iiie prop{rsitions c¡f section 3 depend on the shrinking cake
hypcth*sis arrr, ir fcllnv,,* rhai proposition 4 remains valid in general provided possible ¡:erfect equilibr"iun'i
that t1-,* se ts É-". are s*itabl¡ constn¡cted. we shall not attempt an exhaustive outcornes ln subgamns
ccrnmencing n{ tiffirj lk
accouni of tiir appropriare ;rllstruction of the sets E, since itre degenerate witl'r player 1 ¡rroposing
1

cases !\t--uid coniuse the lssue. lnstead we indicate in figure 5.26 the áppro-
priate inductivr srep irr the i*ur situaticrns which we deem non-degenerate.

\,4 {"T5í.]ILLAIII{G C.4KES W1TFI FTXED DISCOUNT RATES

A natural l-lr;1 exarnple oi the cass uf a non-si"i¡inking cake is obtnined Lry

taking
i
;1
,:{x:x¡,i:.ü. 11}0 and p'lx*qrtx2{i} I
I

.1
as ir¡ se;t ion s 'o i.it o mittin6 'tirr* lr yrcthesis that (p" ) anil ( i7n, ) are decreasrng.
There is nothin¡ essentiaLil.nerE be'i,'ond that ¡nentioneci i¡r sectiun 6 on
¡

conlergence iii;¿sti<¡ns and il.e th*¡efore specialize by taking tr: ilt l)1
-
0, 1,
"'
... .] al'"1
P-i.sure 5"?ú
Fzn: db1"t. tlzr:61nt
[rzn-t :5(:r"¡¡
¡.
4zn, t ,= bb?n+t')t .

Llne ¡r¡ar imagine thai there are two cakes availabie (or one oscillating cake]. I

i:r.¡e and oiily one oi' which can be divided il the players can agree crr a l

rake availeble i¡s at finre 0i

{0,1i
rhe avarlability cf the cakes aiternates with the proposels wix¡
elivisiorr.
disco¡¡rt luture consuniption at tlxed discount rates ü1and 62. Figur* -5"2? i\i\ r,vheri piar¡er i pr op0{;r?$

illusiiatr,s the tri,r; cakes at tim¿ 0. l\1\

The nosi interes"ting caseisthat in rvhich0(¿z( I and0<ü < i asillus- i} )L-
I

{ r:}, cake ¿vailcL¡le {*s al l!¡¡i1

trateci" i-hc advanrage that a player enjoys through being proposcr is then I
I
''- 0i wheri pla'¡er ? r.)ril p{r9nli
balar¡r:ed l-:y thr: iaci thst th* available cake is the least lavourable for hinr. I
i
Figurr"' 5.1.3 illusrr¿tes tlle application of the technique described in sectlon i
I

13 when & ói, it will be ncrred that case I of figure 5.26 applies tc begin
'i I

1,,_"*
with bux eventuall3' case IV ra!:es over {since the point. p will ultimately lie {¿,0) {1 ,0)
above th'¡ line x- *,-,9). we are ihus reduced to the situation stuelied in sections
trior¡rp 5 ?7
6 and I but with a rathe¡ iaster rate ot'coavergence. S¡ational.itv consitlera.
tions ailr.r,.v il-¡e ,:eirn¡rutation of the unique perfect equilibrium or¡tcome, This
 Perfect equilibria in bargaining models r03
r0l Pert'ect equiübria in bargaining rnodels

x2 x0

possibilities at
time f2r_ 1

Fígure 5.28

is achieved via an acceptance of player I's initial proposal and assigns him a
payoll
/ t-D6t \
"\1 _ ruu'¿)
rvhiie player 2 receives

/ l-abt, \
, bol{,t,
-"¿¿'oll F'igure 5.29

This reduces to the result of Rubinstein mentioned in note 4 when 6: L1 : L

As expiained in section 8, it is of interest to str"ldy the case when / + 0*. In

the lirnit. the unique perfect equilibriurn outcome is then the point l/ of We now turn to the case when c> t' b) 1 and all\!' Under th*sc'
and the
ligure 5.27 independently of the values of the discount rates 6¡ and 82. circurnstances case il of figure 5'26 applies throughout ]ecfni'lue
'Ihis last r¡bservation provides some grounds for regarding Iy' as the 'Nash does nr¡t lirnit the possibilitles for perfect
equilibria outcorile$ at all. Figures
are all achievablc as
bargaining soiutiorr' for the two-cake problem. &rme additional groirnds are 5.?.9 and 5-10 indicate why x0,.vt and x2 of figure 5'29
:rentianed in cha¡rter 8. perfect eqi.riiibrium outcomcs in this case'
11,14 Perfet:t equilihria in bargaining wodtls Perfect equilibritt in batgaíning r¡¡e¡de/¡ $W

l{icks, J. 1953: Íhe Theor¡- of Woges. tr{acMiitan, i-ondon'

Macl_ennan, A. 1982t A general noncooperative theory
of bargaininS. uu*-
uersit'"' of Toronto mir¡¡eo'
Moulin, Il. (1982: Eargaining and non-cocperative irnplementation. Working:
paper, École polytechnique, Laboratoire Ü'Flccn+rnÉtrie, Paris'
noin, A. l9'19.: Axiarnatic M¡¡¡lels of Bargaining. tr-ecture ilotes in E,conom:c;
lt¡i
and Mathernatical Systems i?0' Springer-Verlag, New York'
rli Rubinstein, A" l9B0: Perfect equ-ilibrium in a L¡a¡gai¡ring morJel" ICLR$
lti cliscussion paper, I-ondon School of Econornics'
Stáhl, I. 1972:, Ea¡gaining Thersry.' . Economic R.esearch lnstitute, Stockholre.
\t La"
|l
y3

Y
7.
vy3

I''igure 5 .3 0

Ii.iJFET{ENCES

llrnrnrr¡e, K. C. 198l: Bargaining, Prnceedhgs of the Conference ':i' the

¡rss,rr:iation ct lJniversity 'Ieachers of Er:ononics.
ilistrop^ ii.. 1". 1Q63: Game theoretic analyses of bargaining. QuarÍe rl.tt .l,Lttrt¡ei
.).f' {:.' c.ryt út?i, i:.,, 7 7, 5 59-"602.
l:r:lrit:s, l-. l!ii¡4: A cieterminate model of bilateral monopi)1y. Et'cnontica,
31, ii?--r1.
i.iarsariyi_ i. i.yl ,:. ilational Behaviour anri Burgaíning E'quiiibriurtt ip ilames
cntl 5t¡riai SiiLeatíons. CUF, Canibridge.