(Aumann) Bargaining Theory

Aumann's bargaining theory models how two parties can reach an agreement when dividing a surplus. It predicts the outcome based on each party’s best alternative if no agreement is reached, known as their "threat point." The theory suggests that the final division balances each side’s bargaining power, resulting in an agreement that is fair relative to their alternatives. Essentially, it explains how rational agents negotiate to split gains in a way that neither has an incentive to walk away, considering their outside options and the value they assign to the deal.