Author(s):

IN-KOO CHO AND AKIHIKO MATSUI

Abstract:

This paper provides a decentralized dynamic foundation of the Zeuthen-Nash bargaining solution, which selects an outcome that maximizes the product of the individual gains over the disagreement outcome. We investigate a canonical random matching model for a society in which two agents are drawn from a large population and randomly matched to a partnership, if they successfully find an agreeable payoff vector. In each period, the two agents choose to maintain or terminate the partnership, which is subject to a small exogenous probability of break down. We show that as the discount factor converges to 1, and the probability of exogenous break down vanishes, the Zeuthen-Nash bargaining solution emerges as a unique undominated equilibrium outcome. Each agent in a society, without any centralized information processing institution, behaves as if he has agreed upon the Zeuthen-Nash bargaining solution, whenever he is matched

to another agent.