Econometrica: Jul, 2015, Volume 83, Issue 4

A Dynamic Reinterpretation of Nash Bargaining With Endogenous Threats

https://doi.org/10.3982/ECTA11711
p. 1641-1655

D. Abreu and D. Pearce

This paper concerns the two‐stage game introduced in Nash (1953). It formalizes a suggestion made (but not pursued) by Nash regarding equilibrium selection in that game, and hence offers an arguably more solid foundation for the “Nash bargaining with endogenous threats” solution. Analogous reasoning is then applied to an infinite horizon game to provide equilibrium selection in two‐person repeated games with contracts. In this setting, issues about enforcement of threats are much less problematic than in Nash's static setting. The analysis can be extended to stochastic games with contracts.