Strategic step-by-step negotiation

We analyze a specific type of negotiation process where parties proceed in stages taking into consideration that negotiation may end prematurely with an inefficient agreement. Parties negotiate only one increasing pie, thereby avoiding inefficiencies which are typical for issue-by-issue negotiations. For ann-stage game, we prove the existence of a unique subgame-perfect equilibrium. We then show that step-by-step negotiation can only improve players' expected payoffs if negotiation in stages reduces the difference between their equilibrium offers. For this to occur, however, the risk of negotiation must be affected by the agenda of the bargaining problem.