A mechanism for solving bargaining problems between risk averse players

Overview & Synopsis

We propose a mechanism for resolving bargaining problems. The mechanism allows two players to make a sequence of simultaneous propositions. At any step, as long as the players have not reached an agreement, they can choose to implement a lottery between the different propositions. In this aspect, the mechanism is similar to the so called final others arbitration. However, contrary to the existing scheme, our mechanism is not compulsory. The history of the negotiation process is recorded and players can refuse an offer and go back in the process to a previous step. This generates an evolving sequence of status-quo points and results in a sequence of equilibrium others of the two play-ers that gradually converge towards each other. Our model assumes no discounting and complete information. Rather than time preferences, the main incentive to reach an agreement under our mechanism comes from risk aversion. Players have an incentive to avoid the uncertainty related to the lotteries that occur when offers do not result in an agreement. Rather than incomplete information, the process gradualism is driven by the necessity to make step by step concessions in order to generate evolving threat points. We show that under this mechanism, the unique subgame perfect equilibrium that does not use weakly dominated strategies coincides with a well-known static solution concept, the Raiffa solution.