Bargaining with Outside Options and Asymmetric Information

Project: Research

View graph of relations


This project develops the theory of bargaining with information asymmetry and outside options. This project focuses on informational effect of outside options. For example, in awage negotiation, a firm's outside option can disclose internal information relevant to the negotiation. The firm will therefore strategically reveal or conceal its outside option.The project argues that such an informational effect is crucial in understanding bargaining problems.The project analyzes a two-person bargaining problem with asymmetric information.The key features are that (i) the informed party has an outside option available during negotiation, (ii) the value of the outside option and the value of gain from agreement are the informed party's private information, and (iii) the two values are correlated eithernegatively or positively. Hence, the uninformed party can infer the informed party's private information based on how the informed party addresses the outside option.The project employs both sequential bargaining and mechanism design approaches. Thesequential bargaining approach assumes a specific bargaining protocol, and analyzes thebargaining outcome as an equilibrium of the extensive-form game. The results from thisapproach are easy to interpret and apply, but sensitive to bargaining protocol assumed.The mechanism design approach complements the sequential bargaining approach to produce a robust insight that holds for any bargaining protocol.Bargaining and negotiation are longstanding decision-making mechanisms that remainpopular in both public and private spheres. Moreover, both outside options and information asymmetry are prevalent in bargaining situations. The project will thereforeprovide widely applicable insights, including the following expected applications.1. The project develops a theory of bargaining impasse. A preliminary result suggests byan example that the informational effect of outside options can be a source ofbargaining impasse. The idea in the example will be extended and generalized.2. The project is expected to deliver insights into current economic issues. For example,the project examines the recent advancement of information technology. In particular,the improvement of search technology makes it easier and more effective to locateoutside options during negotiations. The comparative statics with respect to the outsideoption's arrival rate will provide insights to this change.3. The project extends search-and-matching models. An agent in a search-and-matchingmarket may negotiate with an existing partner before he or she leaves andsearches for new partners. Current search-and-matching models, however, abstractfrom such a negotiation process. The aim of the project is to extend search-and-matchingmodels by incorporating an explicit model of negotiations.


Project number9048088
Grant typeECS
Effective start/end date1/07/163/12/19

    Research areas

  • bargaining , asymmetric information , outside option , mechanism design , impasse