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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. 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.
    3. 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.
    4. Joel Watson, 2007. "Contract, Mechanism Design, and Technological Detail," Econometrica, Econometric Society, vol. 75(1), pages 55-81, January.
    5. 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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