Long-run Negotiations with Dynamic Accumulation

Francesca Flamini, University of Glasgow


We study repeated bargaining games in which two parties can decide how much to invest and how to share the residual surplus for their own consumption. Since the current level of investment affects the size of future surpluses, the framework includes a dynamic accumulation problem. We show that there is a unique (stationary) Markov Perfect Equilibrium characterised by immediate agreement. Generally, the most patient party demands a larger share of the residual surplus, unless production is sufficiently long. Moreover, if returns to investment are sufficiently high, he will invest less than his opponent when the intertemporal elasticity of substitution is less than unity. Bargaining is efficient only in a frictionless world, otherwise parties may either over- or under-invest. Our results are robust to different bargaining procedures, rates of time preferences and intertemporal elasticities of substitution.


Biography:  Francesca joined the Department of Economics in Glasgow in September 2000.  She previously held positions at the University of Exeter and the Istituto di Studi per la Programmazione Economica, Rome.  She holds degrees from the University of Rome "La Sapienza", University College London and the University of Exeter.