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Theoretical Economics Paper
Time Preferences and Bargaining
Sebastian Schweighofer-Kodritsch
August 2015
Paper No' TE/2015/568:
Full Paper (pdf)

JEL Classification: C78;D03;D74

Tags: alternating offer; time preference; impatience; discounting; dynamic inconsistency; delay; optimal punishment; simple penal codes; non-stationary equilibrium

This paper presents an analysis of general time preferences in the canonical Rubinstein (1982) model of bilateral alternating-offers bargaining. I derive a simple sufficient structure for optimal punishments and thereby fully characterize (i) the set of equilibrium outcomes for any given preference profile, and (ii) the set of preference profiles for which equilibrium is unique. When both players have a present bias— empirically, a property of most time preferences regarding consumption, and implied, e.g., by any hyperbolic or quasi-hyperbolic discounting—equilibrium is unique, stationary and efficient. When, instead, one player finds a near-future delay more costly than delay from the present—empirically common for time preferences over money—non stationary equilibria arise that explain inefficiently delayed agreement with gradually increasing offers.