Evolution, Investment, and Bargaining

Abstract

We present an evolutionary model which allows us to study the impact relationship-specific investment has on bargaining. Agents are matched to play an investment and bargaining game. During bargaining, agents have an outside option to form a new relationship, but in exercising this option loses their current investment. We find that the stochastically stable post-investment bargaining convention is dependent on the cost of investment. In particular, the larger the cost of investment, the lower is the share of gross surplus that is received. This stands in contrast with previous studies. In addition, we find that there is under-investment. We disentangle the forces which lead to these two results.