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Enhancing Honesty in Bargaining Under Incomplete Information: An Experimental Study of the Bonus Procedure

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  • James E. Parco

    (United States Air Force Academy)

  • Amnon Rapoport

    (University of Arizona
    Hong Kong University of Science and Technology)

Abstract

The sealed-bid k-double auction mechanism for two-person bargaining under incomplete information can be extended by providing a bonus for both traders if, and only if, an agreement is reached. Brams and Kilgour (1996, Group Decision and Negotiation, 5, 239–262) proved that there is a unique level of bonus, namely, half the difference between the buyer’s bid and seller’s ask, that induces the traders to bargain truthfully. Stein and Parco (2001, unpublished manuscript) extend the theoretical work to the case of partial bonus levels that reduce, but do not completely eliminate, misrepresentation of the reservation values. In the present study, we experimentally investigate the effects of providing different bonus values on the misrepresentation of the bargainers’ reservation values. Our results show that implementation of a bonus has a significant impact on bargaining behavior but not nearly to the extent predicted by the equilibrium analysis. A reinforcement-based learning model originally proposed for the no bonus case accounts quite well for the results of all three experimental conditions.

Suggested Citation

  • James E. Parco & Amnon Rapoport, 2004. "Enhancing Honesty in Bargaining Under Incomplete Information: An Experimental Study of the Bonus Procedure," Group Decision and Negotiation, Springer, vol. 13(6), pages 539-562, November.
    • Handle: RePEc:spr:grdene:v:13:y:2004:i:6:d:10.1007_s10726-005-3824-4
    DOI: 10.1007/s10726-005-3824-4
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    References listed on IDEAS

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    Cited by:

    1. Terry E. Daniel & James E. Parco, 2005. "Fair, Efficient and Envy-Free Bargaining: An Experimental Test of the Brams-Taylor Adjusted Winner Mechanism," Group Decision and Negotiation, Springer, vol. 14(3), pages 241-264, May.
    2. Kyropoulou, Maria & Ortega, Josué & Segal-Halevi, Erel, 2022. "Fair cake-cutting in practice," Games and Economic Behavior, Elsevier, vol. 133(C), pages 28-49.
    3. Parco, James E. & Murphy, Ryan O., 2013. "Resistance to truthful revelation in bargaining: Persistent bid shading and the play of dominated strategies," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 154-170.
    4. James E. Parco, 2006. "Price-setting power and information asymmetry in sealed bidding," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(6), pages 413-434.

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