Rubinstein's alternating-offers bargaining model is enriched by assuming that players' payoffs in disagreement periods are determined by a normal form game. It is shown that such a model can have multiple perfect equilibria, including inefficient ones, provided that players are sufficiently patient. Delay is possible even though there is perfect information and the players are fully rational. The length of delay depends only on the payoff structure of the disagreement game and not on the discount factor. Not all feasible and individually rational payoffs of the disagreement game can be supported as average disagreement payoffs. Indeed, some negotiation games have a unique perfect equilibrium with immediate agreement.

This paper defines and tests a form of market efficiency called market dexterity which requires that asset prices adjust instantaneously and completely in response to new information. Examining the behavior of the yen/dollar exchange rate while each of the major markets are open it is possible to test for informational effects from one market to the next. Assuming that news has only country specific autocorrelation such as a heat wave. any intra-daily volatility spillovers (meteor showers) become evidence against market dexterity. ARCH models are employed to model heteroskedasticity across intra-daily market segments. Statistical tests lead to the rejection of the heat wave and therefore the market dexterity hypothesis. Using a volatility type of vector autoregression we examine the impact of news in one market on the time path of volatility in other markets.

We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made under imperfect information about demand, optimal decisions based on sentiments can generate stochastic self-fulfilling rational expectations equilibria in standard economies without persistent informational frictions, externalities, nonconvexities, or strategic complementarities in production. The models we consider are deliberately simple, but could serve as benchmarks for more complicated equilibrium models with additional features.