A Behavioral Model of Bargaining with Endogenous Types
We enrich a simple two-person bargaining model by introducing “behavioral types” who concede more slowly than does the average person in the economy. The presence of behavioral types profoundly influences the choices of optimizing types. In equilibrium, concessions are calculated to induce “reciprocity”: a substantial concession by player i is followed by a period in which j is much more likely to make a concession than usual. This favors concessions by i that are neither very small nor large enough to end the bargaining immediately. A key diﬀerence from the traditional method of perturbing a game is that the actions of our behavioral types are not speciﬁed in absolute terms, but relative to the norm in the population. Thus their behavior is determined endogenously as part of a social equilibrium.
Abreu, Dilip and Pearce, David G., "A Behavioral Model of Bargaining with Endogenous Types" (2003). Cowles Foundation Discussion Papers. 1722.