Tacit Bargaining in International Relations

The authors develop a characterization of subgame perfect equilibrium strategies in discounted repeated games that highlights a class of strategies called countervailing. When using countervailing strategies, the players focus on manipulating the other side's payoff to induce his cooperation. These strategies do not require one player to entertain specific expectations about the strategic choice of the other. For this reason, countervailing strategies are promising vehicles for tacit bargaining. The authors test their relevance using a case of international trade—Japan's penetration of the U.S. automobile market in the early 1980s. The empirical section provides evidence of the tacit bargaining behavior that the model predicts.