Gradualism in Bargaining and Contribution Games

This paper identifies a source of gradualism in bargaining andcontribution games. In the bargaining games we examine, each partycan opt out at any time, and the outside option outcome is assumed todepend on the offers made in the negotiation phase. Specifically, we assumethat (1) making a concession in the negotiation phase increases the otherparty's outside option pay-off and (2) the outside option outcome inducesan efficiency loss as compared with a negotiated agreement. The mainfinding is that the mere presence of such history-dependent outside optionsforces equilibrium concessions in the negotiation phase to be gradual,and the degree of gradualism is characterized. The model also applies tocontribution games in which the outside option may be interpreted as theoption to implement a partial project using the total contributions made sofar. Copyright The Review of Economic Studies Limited, 2004.