Staff Report 172

Dynamic Bargaining Theory

Melvyn Coles
Randall Wright | Consultant

Published June 1, 1994

The goal of this paper is to extend the analysis of strategic bargaining to nonstationary environments, where preferences or opportunities may be changing over time. We are mainly interested in equilibria where trade occurs immediately, once the agents start negotiating, but the terms of trade depend on when the negotiations begin. We characterize equilibria in terms of simply dynamical systems, and compare these outcomes with the myopic Nash bargaining solution. We illustrate the practicality of the approach with an application in monetary economics.

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