Synergies in production are ubiquitous in shared production processes such as those involving individuals within a team, departments within a firm, or industries within a country. Using a weakest-link game with ex post bargaining to redistribute the joint surplus we study a situation in which no central manager (or principal) can induce coordination through contracts, but instead team members themselves decide how to compensate each other. We show that standard bargaining theory (stationary equilibria) predictions do not provide a rationale for selecting efficient outcomes among the multiple Pareto-ranked equilibria. Nevertheless, we propose history-dependent bargaining strategies based on members' contributions which refine the set of equilibria selecting only the most and least efficient outcomes. An experiment shows that ex post bargaining leads to enhanced efficiency compared to the benchmark weakest link game. This is a particularly strong result since we implement a random subject rematching protocol. When efforts are not publicly known (due to monitoring costs for example) average effort levels fall close to those observed in the control. Our results provide a rationale for the role of democracy in attaining efficient economic outcomes and explain why firms and partnerships might implement ex post profit-sharing or other participatory compensation mechanisms within them.
Journal of the Economic Science Association Inaugural Issue, July 2015
We report the results of an experimental investigation of the Baron-Ferejohn (1989) model of legislative bargaining with cheap talk. Communication results at substantially increased proposer power, close to the stationary subgame perfect equilibrium prediction. Primarily this is achieved through voter-initiated bargaining to be included in the winning coalition, while arguing for a zero allocation for redundant committee members. Voters consistently follow through on their reservation stated shares, with proposers not partnering with voters who state excessively low reservation shares. Blocking coalitions between voters are rarely successful .
Baranski, Andrzej. 2016. "Voluntary Contributions and Collective Redistribution." American Economic Journal: Microeconomics, 8 (4): 149-73.
I study a multilateral bargaining game in which committee members invest in a common project prior to redistributing the total value of production. The game corresponds to a Baron and Ferejohn (1989) legislative bargaining model preceded by a production stage that is similar to a voluntary contribution mechanism. In this game, contributions reach almost full efficiency in a random rematching experimental design. Bargaining outcomes tend to follow an equity standard of proportionality: higher contributors obtain higher shares. Unlike other bargaining experiments with an exogenous fund, allocations involving payments to all members are modal instead of minimum winning coalitions, and proposer power is quite low.
This article sets forth a model of multilateral negotiations with alternating offers and
voting in which members bargain over the distribution of equity shares prior to engaging in
joint production. The proposer faces a trade-off between rent-sharing and rent-generation
subject to the constraint of receiving a majority vote. If he attempts to offer small equity
shares to coalition partners, the size of the pie might shrink, rendering his large ownership
percentage unfruitful. In equilibrium, the proposer forms a minimum winning coalition by
offering two types of shares: Some members are incentivized to contribute and they receive
a share that yields a payoff greater than the ex ante value of the game. The remaining
coalition partners are offered a share that buys their vote without inducing contribution.
Higher voting quotas result in lower efficiency while larger committees may yield higher
efficiency. In a variant of the model where partners negotiate compensations contingent on
contributions (instead of equity shares), full efficiency can be achieved for any voting rule
and committee size but this does not entail unanimous approval.
Status: Working Paper
We consider a two-period durable-goods monopoly model with a continuum of consumer types. In period two the monopolist launches a higher quality version of the product. We evaluate both closed and open resale markets. When consumers cannot trade their old units, the subgame perfect equilibrium exhibits a rich pattern of transactions and prices as a function of the quality improvement parameter q . Due to the inability to commit, profits are decreasing in q for values close to the initial quality. When consumers can trade old units on a competitive resale market, there is a subtle interaction between the firm's pricing and the resale price. Profits are typically (but not always) higher with, rather than without, an open resale market. In the resale market the volume of transactions is not monotonic in q yet the resale price is always falling with the quality of the new good. In contrast with the literature, a monopolist that can commit to future sales prices will not achieve the renter's profits.
Status: Under Revision. | Version February 2017
We explore the efficiency and distributive implications (theoretically and experimentally) of a multilateral bargaining model with endogenous production of the surplus under two different timings: ex ante and ex post bargaining. Both timings are commonly observed in business partnerships and alliance formations. The theoretical predictions confirm an intuitive economic tenet: in ex post bargaining, effort is considered sunk and opportunistic bargaining behavior will dissuade players from producing. On the other hand, ex ante bargaining entails an allocation of ownership shares that induces at least certain members to invest in the common fund because their return is guaranteed. Experiments show opposite results: ex ante bargaining yields almost fully efficient outcomes while the reverse timing entails near zero efficiency.