American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Dynamic Outside Options and Optimal Negotiation Strategies
American Economic Review
vol. 114,
no. 10, October 2024
(pp. 3284–3313)
Abstract
We study the design of negotiation strategies when a principal and agent must decide how to split a pie while the agent's outside option changes over time. The principal's optimal strategy under commitment demonstrates a new, but intuitive, set of negotiation dynamics. When the agent is tempted to leave, the principal gradually promises a larger share (decreasing demands) and more time to explore the outside option (decreasing pressure), illustrating a complementarity between these two tools. Although the principal's expected utility is decreasing in the outside option, his expected utility and demands are increasing in the outside option's drift and volatility.Citation
McClellan, Andrew. 2024. "Dynamic Outside Options and Optimal Negotiation Strategies." American Economic Review, 114 (10): 3284–3313. DOI: 10.1257/aer.20230015Additional Materials
JEL Classification
- D63 Equity, Justice, Inequality, and Other Normative Criteria and Measurement
- D82 Asymmetric and Private Information; Mechanism Design
- D86 Economics of Contract: Theory