Markov Bargaining Games

I consider an alternating offer bargaining game which is played by a risk neutral buyer and seller, where the value of the good to be traded follows a Markov process. For these games the existence of a perfect equilibrium is proved and the set of equilibrium payoffs and strategies are characterised. The main results are: (a) If the buyer is less patient than the seller, then there will be delays in the players reaching an agreement, the buyer is forced into a suboptimal consumption policy and the equilibrium is ex-ante inefficient. (b) If the buyer is more patient than the seller, then there is a unique and efficient equilibrium where agreement is immediate. JEL Classification : 026