Abstract:
We study how to design optimal bargaining strategies in a bargaining model with two players, P and A, when A’s outside option changes over time. We solve for P’s optimal strategy and find a new, but intuitive, set of bargaining dynamics. When A’s outside option increases, A is tempted to cease bargaining, leading P to increase A’s continuation by gradually promising A a larger share of the surplus (decreasing demands) and giving A more time to explore his outside option before being forced to make a decision (decreasing pressure). We explore comparative statics and show that although P ’s value of bargaining is decreasing in A’s outside option, it increases when the expected value of A’s outside option tomorrow rises. We show P’s optimal strategy can be implemented without commitment.