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On the outside-option principle with one-sided options

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  • Watson, Joel

Abstract

This note examines a bargaining game in which a single player has an outside option that can be taken in any period of time. If the outside-option value is close to the efficient frontier, then there exist equilibria that contravene the “outside-option principle.” In particular, the player with the outside option may receive significantly less than his/her equilibrium payoff in the game without it. An example of option-contract renegotiation is provided.

Suggested Citation

  • Watson, Joel, 2020. "On the outside-option principle with one-sided options," Economics Letters, Elsevier, vol. 191(C).
    • Handle: RePEc:eee:ecolet:v:191:y:2020:i:c:s0165176520300963
    DOI: 10.1016/j.econlet.2020.109110
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    References listed on IDEAS

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    1. Buzard, Kristy & ,, 2012. "Contract, renegotiation, and hold up: Results on the technology of trade and investment," Theoretical Economics, Econometric Society, vol. 7(2), May.
    2. Joel Watson, 2007. "Contract, Mechanism Design, and Technological Detail," Econometrica, Econometric Society, vol. 75(1), pages 55-81, January.
    3. JÕzsef SÂkovics & Clara PonsatÎ, 1998. "Rubinstein bargaining with two-sided outside options," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 11(3), pages 667-672.
    4. Ken Binmore & Avner Shared & John Sutton, 1989. "An Outside Option Experiment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(4), pages 753-770.
    5. Buzard, Kristy & ,, 2012. "Contract, renegotiation, and hold up: Results on the technology of trade and investment," Theoretical Economics, Econometric Society, vol. 7(2), May.
    6. Shaked, Avner & Sutton, John, 1984. "Involuntary Unemployment as a Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 52(6), pages 1351-1364, November.
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    More about this item

    Keywords

    Near-efficient outside options; Bargaining games; Negotiation; Bargaining solutions; The hold-up problem;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory

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