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Illustrated Examples of the Effects of Risk Preferences and Expectations on Bargaining Outcomes

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  • David L. Dickinson

Abstract

The author highlights bargaining examples that use expected utility theory. Bargainer payoffs in the event of a dispute are represented by a simple lottery. Expectations are assumed to affect a bargainer's subjective probabilities over lottery outcomes, and risk preferences affect the expected utility of a given lottery. Risk preferences and/or expectations are predicted to influence both negotiated outcomes and the likelihood of a bargaining impasse. The analysis shows that, ceteris paribus , risk aversion or pessimism, or both, will cause a bargainer to capture less of the pie in negotiations. Similarly, risk-loving and optimistic bargainers are more likely to experience impasse because of the disappearance of the contract zone. The results are intuitive, can be shown graphically and algebraically, and provide upper-level students with engaging examples that show the usefulness of expected utility theory.

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File URL: http://hdl.handle.net/10.1080/00220480309595210
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The Journal of Economic Education.

Volume (Year): 34 (2003)
Issue (Month): 2 (January)
Pages: 169-180

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Handle: RePEc:taf:jeduce:v:34:y:2003:i:2:p:169-180

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Cited by:
  1. Charness, Gary & Kuhn, Peter J., 2010. "Lab Labor: What Can Labor Economists Learn from the Lab?," IZA Discussion Papers 4941, Institute for the Study of Labor (IZA).

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