This paper develops an explanation of why bargainers often terminate negotiations in disagreement in spite of positive expected gains from continued negotiation. The key to the analysis is a model which embeds bargaining activity within a market. Agents are continually faced with the choice between continuing to bargain with an existing partner or searching for a new partner. Bargainers may then terminate negotiations without an agreement, in spite of positive expected gains from continued bargaining, because seeking a new bargaining partner promises a higher return.

Abstract: This paper develops an approach to equilibrium selection in game theory based on studying the equilibriating process through which equilibrium is achieved. The differential equations derived from models of interactive learning typically have stationary states that are not isolated. Instead, Nash equilibria that specify the same behavior on the equilibrium path, but different out-of-equilibrium behavior, appear in connected components of stationary states. The stability properties of these components often depend critically on the perturbations to which the system is subjected. We argue that it is then important to incorporate such drift into the model. A sufficient condition is provided for drift to create stationary states with strong stability properties near a component of equilibria. This result is used to derive comparative static predictions concerning common questions raised in the literature on refinements of Nash equlibrium.;

This paper examines an infinite horizon bargaining model, incorporating five features: two-sided incomplete information (with potentially information-revealing strategies), an infinite horizon, uncertainly concerning the potential gains from trade, an illumination of interesting qualitative bargaining issues, and plausible (free from arbitrarily specified out-of-equilibrium conjectures) equilibria. These features, motivated in the paper, have powerful implications. A Nash equilibrium exists, and is generically both unique and sequential. Comparative static implications of variations in the game's specifications are developed. We find that natural indications of bargaining strength emerge from the model, and establish the intuitive result that an increase in a player's relative bargaining strength makes that player more likely to capture the gains from bargaining.

We examine an economy in which the cost of consuming some goods can be reduced by making commitments that reduce flexibility. We show that such consumption commitments can induce consumers with risk-neutral underlying utility functions to be risk averse over small variations in income, but sometimes to seek risk over large variations. As a result, optimal employment contracts will smooth wages conditional on being employed, but may incorporate a possibility of unemployment. Copyright 2008, Wiley-Blackwell.