Disagreement and Authority

Can two negotiators fail to agree when both the size of the surplus and the rationalityof the negotiators are common knowledge? We show that the answer is affirmative.When the negotiators can make irrevocable commitments at a low but positive cost,the unique symmetric equilibrium entails disagreement with high probability. In theunique pair of pure strategy equilibria, one party gets all the surplus. Even thoughwe impose no constraints on side-payments, efficient compromises are unattainable. Astrongly asymmetric authority relationship is thus the only viable alternative to costlyconflict.