Games & Strategies

FEN-Universidad de Chile
Solutions of Problem Set
Topic: Bargaining (sequential models)
February 28, 2024

Instructor: Gino Loyola.

1. Sequential negotiation with exogenous and endogenous externalities.

SOLUTION
(b)

θA > 0

b
B Externality
Game
θB > 0

A b

0≤x≤1

B Bargaining
b Game (UG)

Accepts Rejects
   
x − θA (1 − x) 0
(1 − x) − θB x 0

1
 2. Ultimatum Game with explicit asymmetric outside options.

SOLUTION
(b)

A b

0 b
B 1

Accepts Rejects

   
x 0
1−x 0.1

2
 3. UG with risk aversion & asymmetric outside options.

SOLUTION
(a)

A b

0 b
B π

Accepts Rejects

   
x1−α 0
π−x UB

3
 4. Offer-Counteroffer & Inside Options.

SOLUTION
(a)

A.1 b

x1
B.1 t=1
0 b π

Accepts Rejects
b B.2
x1
 
π − x1
x2
A.2 t=2
b

Accepts Rejects

mA + δU A
   
mA + δx2
mB + δ(π − x2 ) mB + δU B

4
 5. Ultimatum Game with explicit values.

SOLUTION
(a)

A b

0 b
B 2

Accept Reject

   1 
x 2
2−x 1

5
 6. Offer-Counteroffer, Inside Options and Multiple Surplus.

SOLUTION
(a)

A.1 b

x1
B.1
0 b π t=1

Opt - out Accept Differ

b
B.2
U A (1 + δ) x1 (1 + δ)
   

U B (1 + δ) (π − x1 )(1 + δ)
x2
A.2 t=2
b

Opt - out Accept

mA + δU A
   
mA + δx2
mB + δU B mB + δ(π − x2 )

6
7. Collective Bargaining & Strike. SOLUTION
(a)

A.1 b

x1

0 b
B.1 π t=1

Accept Defer
B.2 b

 x1 (1 + δ) 
(π − x1 )(1 + δ)
x2
A.2
0 b π t=2

Accept Opt-Out

   
mA + δx2 mA + δβπ
mB + δ(π − x2 ) mB + δ(1 − β)π

7
 8. Takeover & UG.

SOLUTION
(a)

α
b

x
β
0 b π

Accepts Rejects

   
x 0
π−x 0

8
 9. Collective Bargaining, Floor & Strike.

SOLUTION
(a)

A1 b

x1

0 b
B1 βπ t=1

Accept Defer
B2b

 x1 (1 + δ) 
(π − x1 )(1 + δ)
x2

0 A2 βπ t=2
b

Accept Opt-Out

   
mA + δx2 mA + δβπ
mB + δ(π − x2 ) mB + δ(1 − β)π

9
10. UG with risky outside option and risk-aversion.

SOLUTION
(a)

A b

0 b
B π

Accepts Rejects

UA
   
x
(π − x)(1−α) pW11−α

10
11. Offer-Counteroffer & Risk Aversion.

SOLUTION
(a)

A1 b

x1

0 b
B1 π t=1

Accept Reject
b B2
(1−α)
 x1 
(π − x1 )(1−β)
x2

0 A2 π t=2
b

Accept Reject

(1−α) (1−α) 
pWA
  
x2
(π − x2 )(1−β) pWB
(1−β)

11
12. Offer-Counteroffer, Inside Options & Asymmetric Risk Aversion.

SOLUTION

(a)

A1 b

x1

0 b
B1 π t=1

Accept Reject
b B2
x1
 
(π − x1 )(1−β)
x2

0 A2 π t=2
b

Accept Reject

   
mA + δx2 mA + δWA
1−β
mB + δ(π − x2 )(1−β) 1−β
mB + δpWB1−β

12
13. UG with interdependent outside options.

SOLUTION
(a)

A b

0 b
B π

Accept Reject

   
x (1 − θB )υ
π−x (1 − θA )υ

13
14. Offer-Counteroffer & Asymmetric Negative Externality.

A1 b

x1

0 b
B1 π t=1

Accept Reject
b B2
x1
 
(π − x1 ) − θB x1
x2

0 A2 π t=2
b

Accept Reject

   
x2 UA
(π − x2 ) − θB x2 UB

14
15. Offer-Counteroffer, Asymmetric Externality and Inside Options.

A1 b

x1

0 b
B1 π t=1

Accept Reject
b B2
x1
 
(π − x1 ) − θB x1
x2

0 A2 π t=2
b

Accept Reject

mA + δU A
  
mA + δx2
mB + δ[(π − x2 ) − θB x2 ] m + δU B B

15
16. Offer-Counteroffer, Negative Externalities and Inside Options.

A.1 b

x1

0 b
B.1 π t=1

Accept Reject
b B.2
 x − θ (π − x )
1 A 1
(π − x1 ) − θB x1
x2

0 b
A.2 π t=2

Accept Reject

mA + δ A [x2 − θA (π − x2 )] mA + δ A U A
   

mB + δ B [(π − x2 ) − θB x2 ] mB + δ B U B

16
17. Offer-Counteroffer, Wealth Marginal Utility and Collective Bargaining.

SOLUTION

(a)

A.1 b

x1

0 b
B.1 π t=1

Accept Reject
b B.2
αx1
 
β(π − x1 )
x2

0 b
A.2 π t=2

Accept Reject

   
αx2 αγπ
β(π − x2 ) β(1 − γ)π

17
18. OCG, inside options & deadline.

A.1 b

x1

0 b
B.1 π t=1

Accept Reject
b B.2
x1
 
π − x1
x2

0 b
A.2 φπ t=2

Accept Reject

mA + δU A
   
mA + δx2
mB + δ(φπ − x2 ) mB + δU B

18
19. OCG with positive externalities.

A.1 b

x1

0 b
B.1 1 t=1

Accept Reject
b B.2
x1
 
1 − x1 + θx1
x2

0 b
A.2 1 t=2

Accept Reject

   
x2 VA
1 − x2 + θx2 VB + θVA

19
20. UG with inequity aversion.

A b

0 b
B 1

Accepts Rejects

   
x 0
1 − x − θ|2x − 1| 0

20
21. OCG, asymmetric risk aversion & deadline.

A1 b

x1

0 b
B1 π t=1

Accept Reject
b B2
x1
 
(π − x1 )1−β
x2

0 A2 φπ t=2
b

Accept Reject

   
x2 pW1
(πφ − x2 )1−β
pW1 1−β

21
22. OCG with symmetric positive externalities

A1 b

x1

0 b
B1 1 t=1

Accept Reject
b B2
 x + θ (1 − x )
1 A 1
(1 − x1 ) + θB x1
x2

0 A2 1 t=2
b

Accept Reject

x2 + θA (1 − x2 )
   
V A + θA V B
(1 − x2 ) + θB x2
V B + θB V A

22
23. UG with generalized inequity aversion

A
b

0 B 1
b

Accept Reject

x − θA |2x − 1|
  
0
1 − x − θB |2x − 1| 0

23
24. OCG, risk averse offerer & deadline

A1 b

x1

0 b
B1 1

Accept Reject
b B2
 x1−α 
1
1 − x1
x2

0 A2 φ
b

Accept Reject

x21−α pW11−α
   

φ − x2 pW1

24
25. OCG, altruistic offerer & inside options

A1 b

x1

0 b
B1 π

Accept Reject
b B2
 x + θ (π − x ) 
1 A 1
π − x1
x2

0 A2 π
b

Accept Reject

x2 + θA (π − x2 )
  
V A + θA V B
mB + (π − x2 ) mB + VB

25
26. UG & waste negotiation

A
b

0 B π
b

Accept Reject

+ x1
θ
UA
   
2
θ 1
2
+ π−x UB

26
27. OCG, risk averse counterofferer & growing surplus

A1 b

x1

0 b
B1 1 t=1

Accept Reject
b B2
x1
 
(1 − x1 )1−β
x2

0 A2 φ t=2
b

Accept Reject

2
p
   
x2 5
1 1−β
(φ − x2 )1−β (5) p

27
28. OCG and asymmetric inside options

A1 b

x1

0 b
B1 π t=1

Accept Reject
b B2
x1
 
π − x1
x2

0 A2 (1 − α)π t=2
b

Accept Reject

   
δx2 0
απ + δ((1 − α)π − x2 ) απ(1 + δ)

28
29. OCG & waste negotiation

A1 b

x1
B1 t=1
0 b 1 offer

Accept Reject
b B2
1 + x11
 
1
1 + 1−x 1
x2
A2 t=2
0 b 1 counteroffer

Accept Reject

1 + x12
   
3
1
1 + 1−x 2 3

29
30. Invasion, war, annexation, and bargaining

A1 b

x1

0 b
B1 π t=1

Accept Reject
b B2
x1
 
π − x1
x2

0 A2 π t=2
b

Accept Reject

mA + δ(1 − α)π
   
mA + δx2
mB + δ(π − x2 ) mB + δαπ

30
31. OCG, asymmetric risk aversion & deadline

A1 b

x1

0 b
B1 π t=1

Accept Reject
b B2
x1
 
(π − x1 )1−β
x2

0 A2 φπ t=2
b

Accept Reject

   
x2 pW
(φπ − x2 )1−β pW 1−β

31
32. UG & nonlinear externalities

A
b

0 B 3
b

Accept Reject

x − (3 − x)2
   
−3
(3 − x) − x2 1

32
33. OCG with loss aversion under suit threat.

A1 b

x1

0 b
B1 π

Accept Reject
b B2
 −θ(π − x ) 
1
π − x1
x2

0 A2 π
b

Accept Reject

−θ(π − x2 )
   
−θαπ
π − x2 απ

33
34. OCG, asymmetric inside options & risk aversion (Billy revisited).

A.1 b

x1
B.1
0 b π t=1

Opt - out Accept Differ

b
B.2
xα1
   
0
Vβ (π − x1 )β
x2
0 A.2 π t=2
b

Accept Opt - out

δxα2
  
0
mβ1 + δ(π − x2 )β mβ1 + δmβ2

34
35. OCG with generalized agreement valuing.

A.1 b

x1
Offer
0 b
B.1 π t=1

Accept Reject
b B.2
α + x1
 
β + (π − x1 )
x2
Counteroffer
0 b
A.2 π t=2

Accept Reject

   
α + x2 0
β + (π − x2 ) 0

35
36. UG, risk aversion, and numerical regret.

A b

0 b
B 1

Accept Reject

x1−α − 13 x p[21−α − 32 ]
   

(1 − x)1−β 0

36
37. OCG, impatience, and inside option.

A.1 b

x1
Offer
0 b
B.1 1 t=1

Accept Reject
b B.2
x1
 
1 − x1
x2
Counteroffer
0 b
A.2 1 t=2

Accept Reject

mA + 14
   
m A + x2
mB + δB (1 − x2 ) mB + ( 32 )δB

37
38. UG, risk aversion, and risky surplus.

A b

0 b
B 1

Accept Reject

p(θΠH )1−α + (1 − p)(θΠL )1−α

   1−α
V
p((1 − θ)ΠH )1−β + (1 − p)((1 − θ)ΠL )1−β V 1−β

38