Bargaining, bargaining power and the composition of investment with an outside option

Dan Bernhardt, Ilwoo Hwang and Stefan Krasa
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Dan Bernhardt: Department of Economics, University of Illinois and Department of Economics, University of Warwick
Ilwoo Hwang: Department of Economics, Seoul National University
Stefan Krasa: Department of Economics, University of Illinois

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: We modify a canonical two-agent bargaining game with investments in a joint project, by allowing agents to also invest in outside options that improve their bargaining positions. Absent outside options, it is well known that equal bargaining power maximizes output. However, this is no longer true when investment in outside options is possible and the joint-project technology exhibits stronger substitutability than Cobb-Douglas. When this is so, equal bargaining power minimizes project output while maximizing total investment in unused outside options. Paradoxically, when inputs are suffciently strong substitutes, starting at equal bargaining power, each agent would gain from reductions in their own bargaining power.

Keywords: Bargaining; bargaining power; outside option; hold-up problem JEL Codes: C78; D25; L24 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-mic and nep-ppm
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:1559

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