Creative bargaining

We examine what happens if, as players bargain, they can exert costly effort to expand the set of possible proposals. With side payments, new ideas influence the size of the pie but not its division. The benefits of one player's creativity are shared with the other player, so effort is inefficiently low. Without side payments, new ideas do influence the distribution, so players inefficiently limit their search to ideas that favor them. Getting an idea makes an agreement more likely: but it also makes the other player's ideas less likely to be adopted. Consequently, effort can be either excessive or suboptimal. (C) 1998 Academic Press.