A Two-Person Repeated Bargaining Game with Long-Term Contracts

Does a noncooperative equilibrium point necessarily lead to a Pareto efficient outcome in a supergame if binding agreements on actions are possible among players? We present a two-person repeated bargaining game in which players can negotiate for a long-term contract on their actions in the supergame model. We show that a subgame perfect equilibrium point of our game necessarily leads to a Pareto efficient outcome if the equilibrium strategies for both players have zero-memory. We also point out that the question above is answered negatively if the equilibrium strategies for players have complete memory.