Article | RAND Journal of Economics | summer 2009

Bargaining with Imperfect Enforcement

by Lucy White and Mark Williams

Abstract

The game-theoretic bargaining literature insists on non-cooperative bargaining procedure but allows 'cooperative' implementation of agreements. The effect of this is to allow free-reign of bargaining power with no check upon it. In reality, courts cannot implement agreements costlessly, and parties often prefer to use 'non-cooperative' implementation. We present a bargaining model which incorporates the idea that agreements may be enforced noncooperatively. We show that this has a substantial impact in limiting the inequality of agreements, and results in a non-montonicity of the discount rate. The general need to maintain incentives for co-operation means it may appear that 'other-regarding' elements enter agents' utility functions. This helps us to understand why experimental subjects might begin negotiations anticipating 'fair' bargains. The model also explains why some parties may have incentives to deliberately write incomplete contracts which cannot be enforced in a court of law.

Keywords: Agreements and Arrangements; Body of Literature; Contracts; Motivation and Incentives; Code Law; Game Theory;

Citation:

White, Lucy, and Mark Williams. "Bargaining with Imperfect Enforcement." RAND Journal of Economics 40, no. 2 (summer 2009).