The Nash Solution to the Bargaining Problem

Policy formation is a process of political interaction among individuals and groups. While some participants in the political process may share similar, or even identical interests, the political preferences of other participants diverge so that conflicts of interest among participating parties are unavoidable. Nevertheless, such conflicts are often resolved in the policy formulation process. The emerging policies reflect the participants’ policy preferences as well as their political power. This is the essence of the political-power theory of policy formation. The following major questions arise: What is the nature of the political interaction giving rise to observed economic policy? How are the political conflicts resolved? How can this process be modeled? It is only natural to presume that interactions emerge through bargaining and negotiations among participants. Among the various approaches to the solution of the inherent bargaining problem, the Nash/Harsanyi (NH) conceptualization provides an internally consistent framework. Along with the strong theoretical foundations of the NH theory it is also a convenient analytical model. The theoretical foundation for this framework is also the basis of Harsanyi’s (1962a, 1962b) model of social power. As this particular bargaining theory is widely employed in this book, the present chapter is dedicated to the introduction and exposition of the NH