Perfect equilibria in a model of bargaining with arbitration (Q5953420)

The authors consider the basic version of the standard alternating offers bargaining model [\textit{A. Rubinstein}, Econometrica 50, 97-109 (1982; Zbl 0474.90092)] in which two parties negotiate over the division of a surplus normalized to unity. This model is modified to allow the two to agree at any point to call in an arbitrator, whose decision is commonly known and binding. The interesting result is that no matter what the arbitration outcome is, and even though each party has veto power over bringing in the arbitrator, as long as arbitration costs are sufficiently small, there exists a subgame perfect equilibrium outcome of the modified standard noncooperative bargaining model which coincides, subject to the arbitration cost, with the arbitrated outcome. The results are compared with outside option models.