Bargaining with Optimism

Yildiz, Muhamet

Bargaining with Optimism

Annual Review of Economics, 2011, vol. 3, issue 1, 451-478

Abstract: Excessive optimism is a prominent explanation for bargaining delays. Recent results demonstrate that optimism plays a subtle role in bargaining, and its careful analysis may shed valuable insights into negotiation behavior. This article reviews some of these results, focusing on the following findings. First, when there is a nearby deadline, optimistic players delay the agreement to the last period before the deadline, replicating a broad empirical regularity known as the deadline effect. Second, there cannot be a substantial delay under persistent optimism; i.e., excessive optimism alone cannot explain delays. Third, when optimistic players are expected to learn during the negotiation, they delay the agreement in order to persuade their opponents. The delays in these results can be quite costly, Pareto inefficient, and common knowledge at the beginning of the game.

Keywords: heterogeneous priors; delay (search for similar items in EconPapers)
JEL-codes: C73 C78 D03 D74 D84 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (13)

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