The prevalence of take-it-or-leave-it offers

Abstract

We study the effect of the option to exit in finite-horizon, two-person bargaining where players make offers alternatingly and incur fixed costs per period. We show that players use take-it-or-leave-it strategies in the unique equilibrium when there is no discounting. Expecting a low payoff at the next period as a respondent, a proposer would choose to exit after her demand were rejected. This causes her opponent to accept her take-it-or-leave-it offer. This prediction is generically valid even when the division at the final period is exogenously given, and is conditionally true when the cost of bargaining includes discounting.