Veto Bargaining with Incomplete Information and Risk Preference: An Analysis of Brinkmanship

Abstract This paper explains brinkmanship with infinitely repeated veto bargaining games, where players have private information. In the basic model, the paper solves for two types of Perfect Bayesian Equilibria. First, in Risk-Taking Equilibria (RTE), the proposer is more risk-seeking and engages in brinkmanship. Secondly, in Risk-Avoiding Equilibria (RAE), the proposer is more risk-averse and does not engage in it. Brinkmanship is likely to fail because the vetoer knows that once she succumbs to brinkmanship, the proposer will learn her weakness and make her worse offers. In the extended model, thresholds represent preconditions for negotiation. In the Threshold Pooling Equilibria (TPE) for the extended model, the vetoer sets a threshold and sticks to it. This way, the vetoer may increase her expected utility.