PE Research Seminar: Xuancheng Qian

The Madman Choice: Delegation in Reputational Bargaining (JMP)
Date
Sep 29, 2022, 12:15 pm1:30 pm
Location
Event Description

How does the choice of delegation to obstinate behavioral agents affect the outcome of reputational bargaining? I develop a model of reputational bargaining with delegation that endogenizes the choice of strategic obstinacy of agents. Two principals bargain by choosing agents on behalf of themselves who may be rational or obstinate. Rational agents choose demands strategically while obstinate agents are committed to fixed demands and never accept less. Rational agents have an incentive to imitate obstinate behavioral types to benefit from a “tough” reputation against their rational opponents and convince them to concede. Delegation triggers a tradeoff between the desire to force the opponent to concede and the danger of being locked in a stalemate. I characterize the equilibria of this game. Relative to the existing literature with exogenous commitment types where the prior probability is small, delegation effects emerge: the principal either delegates decision-making to the rational agent for immediate agreement or combines the choice of rational and obstinate agents to deter her opponent in which the probability of choosing obstinate agents is substantial and entails inefficiency. In an extension, I consider the possibility of reappointment under different settings.