Noisy Screening and Brinkmanship



I study a repeated bilateral relationship subject to termination. One player, the proposer, offers a transfer in each period. The receiver can accept and continue the relationship, or quit and take an outside option whose value is private information. Unlike in Coasian bargaining, remaining types are those from whom more can be extracted, potentially inviting ratcheting. Tirole (2016) shows that, if the receiver’s type is persistent, there is actually no ratcheting. I show that, if the receiver’s incentives to accept are affected even by small, transient shocks that the proposer cannot perfectly observe, then offers may worsen over time, until the receiver inevitably quits. The reason is that a small escalation causes exit only if the receiver’s type is marginal and the shock is unfavorable. Major escalations may alternate with periods of slow ratcheting. Exit may be inevitable even if the proposer has commitment power. Applications include crisis bargaining in international relations and surplus extraction from an employee.

Publication Status
Working Papers