DP10021 Bargaining with Informational Externalities in a Market Equilibrium

Author(s): Mikhail Drugov
Publication Date: June 2014
Keyword(s): adverse selection, bargaining, competition, delay, externalities, information
JEL(s): C78, D82, D83, L10
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10021

This paper studies a dynamic bargaining model with informational externalities between bargaining pairs. Two principals bargain with their respective agents about the price they will pay for their work while its cost is agents' private information and correlated between them. The principals benchmark their agents against each other by making the same offers in the equilibrium even if this involves delaying or advancing the agreement compared to the autarky. When principals compete in complements this pattern is reinforced while under competition in substitutes the principals trade off the benefits of differentiation in the product market against the cost of the agents' rent.