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Hard Bargains and Lost Opportunities

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  • Binmore, Ken, et al
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    Abstract

    A long tradition in economics assumes that any potential gains from trade will be exploited. This emphasis on efficiency clashes with the possibility that hard bargaining over the division of the surplus may cause some potential deals to be lost. The authors examine an Outside Option Game designed to study the tension between maximizing the size of the surplus and bargaining over the division of this surplus among those who contributed to its creation. An experimental study confirms that subjects often fail to achieve efficient outcomes. A theoretical model accounts for this behavior in terms of an equilibrium achieved in an imperfect world. Coauthors are Chris Proulx, Larry Samuelson, and Joe Swierzbinski.

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    Bibliographic Info

    Article provided by Royal Economic Society in its journal The Economic Journal.

    Volume (Year): 108 (1998)
    Issue (Month): 450 (September)
    Pages: 1279-98

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    Handle: RePEc:ecj:econjl:v:108:y:1998:i:450:p:1279-98

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    Cited by:
    1. Ellingsen, Tore & Robles, Jack, 2000. "Does Evolution Solve the Hold-up Problem?," Working Paper Series in Economics and Finance 358, Stockholm School of Economics.
    2. Troger, Thomas, 2002. "Double Auctions, Ex-Post Participation Constraints, and the Hold-Up Problem," University of California at Santa Barbara, Economics Working Paper Series qt5qv060md, Department of Economics, UC Santa Barbara.
    3. Ellingsen, Tore & Johannesson, Magnus, 2000. "Is There a Hold-up Problem?," Working Paper Series in Economics and Finance 357, Stockholm School of Economics.
    4. Nejat Anbarci & Nick Feltovich, 2013. "How sensitive are bargaining outcomes to changes in disagreement payoffs?," Experimental Economics, Springer, vol. 16(4), pages 560-596, December.
    5. Andreoni,J. & Samuelson,L., 2003. "Building rational cooperation," Working papers 4, Wisconsin Madison - Social Systems.
    6. Randolph Sloof, 2003. "Price-setting Power versus Private Information," Tinbergen Institute Discussion Papers 03-099/1, Tinbergen Institute.
    7. Carpenter, Jeffrey & Rudisill, McAndrew, 2003. "Fairness, escalation, deference, and spite: strategies used in labor-management bargaining experiments with outside options," Labour Economics, Elsevier, vol. 10(4), pages 427-442, August.
    8. Binmore, Ken & McCarthy, John & Ponti, Giovanni & Samuelson, Larry & Shaked, Avner, 2002. "A Backward Induction Experiment," Journal of Economic Theory, Elsevier, vol. 104(1), pages 48-88, May.
    9. Feltovich, Nick & Swierzbinski, Joe, 2011. "The role of strategic uncertainty in games: An experimental study of cheap talk and contracts in the Nash demand game," European Economic Review, Elsevier, vol. 55(4), pages 554-574, May.
    10. Troger, Thomas, 2002. "Why Sunk Costs Matter for Bargaining Outcomes: An Evolutionary Approach," Journal of Economic Theory, Elsevier, vol. 102(2), pages 375-402, February.
    11. Dawid, Herbert & MacLeod, W. Bentley, 2008. "Hold-up and the evolution of investment and bargaining norms," Games and Economic Behavior, Elsevier, vol. 62(1), pages 26-52, January.
    12. repec:dgr:uvatin:2003099 is not listed on IDEAS
    13. Troger, Thomas, 2002. "Double Auctions, Ex-Post Participation Constraints, and the Hold-Up Problem," University of California at Santa Barbara, Economics Working Paper Series qt3f2509gz, Department of Economics, UC Santa Barbara.
    14. Andreozzi, Luciano, 2010. "An evolutionary theory of social justice: Choosing the right game," European Journal of Political Economy, Elsevier, vol. 26(3), pages 320-329, September.
    15. Feri, Francesco & Gantner, Anita, 2011. "Bargaining or searching for a better price? - An experimental study," Games and Economic Behavior, Elsevier, vol. 72(2), pages 376-399, June.

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