Bargaining with Optimism

Posted: 31 Aug 2011

See all articles by Muhamet Yildiz

Muhamet Yildiz

Massachusetts Institute of Technology (MIT) - Department of Economics

Date Written: September 2011

Abstract

Excessive optimism is a prominent explanation for bargaining delays. Recent results demonstrate that optimism plays a subtle role in bargaining, and its careful analysis may shed valuable insights into negotiation behavior. This article reviews some of these results, focusing on the following findings. First, when there is a nearby deadline, optimistic players delay the agreement to the last period before the deadline, replicating a broad empirical regularity known as the deadline effect. Second, there cannot be a substantial delay under persistent optimism; i.e., excessive optimism alone cannot explain delays. Third, when optimistic players are expected to learn during the negotiation, they delay the agreement in order to persuade their opponents. The delays in these results can be quite costly, Pareto inefficient, and common knowledge at the beginning of the game.

Suggested Citation

Yildiz, Muhamet, Bargaining with Optimism (September 2011). Annual Review of Economics, Vol. 3, pp. 451-478, 2011, Available at SSRN: https://ssrn.com/abstract=1920098 or http://dx.doi.org/10.1146/annurev-economics-061109-080334

Muhamet Yildiz (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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