Dynamic Accumulation in Bargaining Games

Abstract: In many bargaining situations the decisions that parties take at one point in time affect their future bargaining opportunities. We consider an ultimatum bargaining game in which parties can decide not only how to share a current surplus but also how much to invest in order to generate future surpluses. We show that there is a unique Markov perfect equilibrium (MPE) in which a proposer consumes the whole surplus not invested. Moreover, when the proposer has a sufficiently high discount factor, his MPE investment level is higher than his opponent’s, for a given capital stock. Finally, we show that bargaining can lead to overinvestment.