No compromise: Uncertain costs in reputational bargaining

Abstract

I show how uncertainty about agents' future costs of delay can lead to substantial bargaining delays when agents have reputational concerns. Reputational concerns arise because with positive probability agents are behavioral types, committed to demanding a fixed share of the surplus. In equilibrium, rational agents may demand almost the entire surplus and then wait, with the deadlock only broken by the arrival of news about future costs, even as the probability of behavioral types vanishes. Although both agents would benefit from a compromise reached immediately, they do not propose such agreements, because doing so would increase an opponent's option value of waiting.