A Note on the Zeuthen-Harsanyi Theory of Bargaining

Abstract

This article shows that the conclusions of the Zeuthen-Harsanyi theory of bargaining, which is widely regarded as an alternative justification for Nash's solution of the bargaining problem, can be extremely sensitive to small changes in the assumption that both bargainers have identical perceptions of the costs of disagreement. Whether this is the case depends on whether bargainers' priors about those costs are optimistic, in a sense made precise in this article. An axiomatic framework for modeling bargaining outcomes when bargainers perceive the costs of disagreement differently is proposed, and it is shown that a class of solutions that generalize Nash's satisfy the natural generalizations of Nash's axioms.

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