The Perverse Effects of Outside Options on Strategic Delay in Bargaining

This paper shows that giving a player an outside option can worsen his payoff in a bargaining game with strategic delay. If the seller has the option to terminate bargaining and sell the good on the spot market, this can limit the ability of a low-valuation buyer to use delayed responses to signal her type. As a result, high-valuation buyers cannot immediately accept a seller's offer with probability one, worsening the seller's payoff.