Time inconsistency and learning in bargaining games

Abstract

This paper studies an alternating-offers bargaining game between possibly time-inconsistent players. The time inconsistency is modeled by quasi-hyperbolic discounting and the “naive backwards induction” solution concept is used in order to obtain the results. Both naive agents who remain naive and those who learn about their own preferences are considered. Offers of the players who are naive or partially naive are never accepted by any type of player in either no learning or gradual learning cases. The game between a naive or partially naive player who never learns and a time-consistent agent ends in an immediate agreement if the time-consistent agent is the proposer. A one period delay occurs if the time-consistent agent is the responder. The more naive the player is, the higher the share received. In addition, two naive agents who never learn disagree perpetually. When naive and partially naive agents play against exponential or sophisticated agents and they are able to learn their types over time, there exists a critical date before which there is no agreement. Therefore, the existence of time-inconsistent players who can learn their types as they play the game can be a new explanation for delays in bargaining. The relationship among the degree of naivete, impatience level and bargaining delay is also characterized. Specifically, for sufficiently high discount factors, agreement is always delayed. On the other hand, if the naive agent has sufficiently firm initial beliefs (slow learning or high degree of naivete), agents agree immediately.