Question
Consider the following bargaining problem: 20 dollars needs to be split between Alice and Bob. Stage 1: Bob makes an initial offer (between $0 and
Consider the following bargaining problem: 20 dollars needs to be split between Alice and Bob.
Stage 1: Bob makes an initial offer (between $0 and $20). Alice then responds by either (1) accepting Bob's initial offer and ending the game, or (2) rejecting and moving the game to stage 2.
Stage 2: Alice makes a counter offer (between $0 and $20). Bob then respond by either (1) accepting Alice's counter offer and ending the game, or (2) rejecting and moving the game to stage 3.
Stage 3: Bob makes a final offer (between $0 and $20). Alice then responds by accepting or rejecting Bob's final offer. If Alice rejects, both Alice and Bob get nothing and the game ends. If Alice accepts, the money is split per the final offer and the game ends.
Alice discounts the future by 10%. That is, from the point view of the current stage, one dollar received in the next stage is worth 0.9 dollar to Alice. Bob discounts the future by 20%. That is, from the point view of the current stage, one dollar received in the next stage is worth 0.8 dollar to Bob.
Assume that when a player is indifferent between accepting and rejecting an offer, he or she will choose to accept the offer. Calculate the subgame perfect Nash equilibrium of this bargaining problem.
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