DP16235 Sequencing Bilateral Negotiations with Externalities

Author(s): Johannes Münster, Markus Reisinger
Publication Date: June 2021
Keyword(s): bargaining power, Bilateral contracting, Endogenous timing, Externalities, Sequential negotiations
JEL(s): C72, C78, D62, L14
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16235

In bilateral negotiations between a principal and two agents, we show that the agents' bargaining strengths are crucial for the determination of the bargaining sequence and the efficiency of decisions. In a general framework with externalities between agents, we find that the surplus is highest if the principal negotiates with the stronger agent first, regardless of externalities being positive or negative. The principal chooses the efficient sequence with negative externalities, but often prefers the inefficient sequence with positive externalities. We show that our results extend to a general number of agents and provide conditions for simultaneous negotiations to be optimal.