Bargaining with imperfect enforcement

The game-theoretic bargaining literature insists on a noncooperative bargaining procedure but implicitly assumes cooperative implementation of agreements. In reality, courts cannot implement agreements costlessly, and parties often prefer to use noncooperative implementation. We present a bargaining model which incorporates the idea that agreements may be enforced noncooperatively. We show that this has a substantial impact in limiting the inequality of agreements, and results in a nonmonotonicity of the discount rate. The model also explains why some parties may have incentives to deliberately write incomplete contracts as a way to enhance their bargaining power. Copyright (c) 2009, RAND.