7. Bargaining

This chapter explores bargaining as a way of determining how the mutual gains from exchange will be distributed, emphasizing that the outcome will depend on the rules of the game and the initial rights held by the players. It illustrates how a combination of governmental intervention (by a fictive "social planner") followed by private bargaining may support better outcomes than could be achieved by either private or public action alone. This highlights a complementarity between the state and civil society in the governance simplex.

The chapter points out that that because the outcome of bargaining depends on the fallback position of each player, players have an incentive to divert resources from production toward improving their next best alternative or diminishing the opponent's. The result is illustrated by models of the "larger piece of a smaller pie" syndrome, exemplified by the war of attrition game where the value of the prize may be entirely dissipated by the bargaining process itself.