2013 Reports

Gambling Reputation: Repeated Bargaining with Outside Options

Lee, Jihong; Liu, Qingmin

We study the role of incomplete information and outside options in determining bargaining postures and surplus division in repeated bargaining between a long-run player and a sequence of short-run players. The outside option is not only a disagreement point but reveals information privately held by the long-run player. In equilibrium, the uninformed short-run players' offers do not always respond to changes in reputation and the informed long-run player's payoffs are discontinuous. The long-run player invokes inefficient random outside options repeatedly in order to build reputation to a level where the subsequent short-run players succumb to his extraction of a larger payoff, but he also runs the risk of losing reputation and relinquishing bargaining power. We investigate equilibrium properties when the discount factor goes to 1 and when the informativeness of outside option diffuses. In both cases, bargaining outcomes become more inefficient and the limit reputation building probabilities are interior.