Bargaining in the Family

This paper has the ambition to describe how families bargain to reach an agreement recognizing that the negotiation process is costly. Costs may emerge as the result of cognitive and non-cognitive limitations, information asymmetries and efforts to acquire them, time constraints and uncertain decision environments bounding the rationality of individuals. Family members may therefore act as satisficers (Simon, 1979) accepting choices that may not be Pareto efficient, but that, more realistically, satisfy a sufficient level of satisfaction. By introducing the cost of negotiating, we span the whole negotiation space and reproduce in slow motion the progress of the bargaining efforts involving simple iterations reflecting the steps taken during real bargaining sessions. Our novel theory results show that family members can reach inefficient bargaining agreements on the contract curve at relatively low cost or may settle the dispute on an efficient point on the Pareto frontier. The empirical analysis of the bargaining household model shows that the large majority of the family agreements is inefficient, lending empirical support to Simon’s hypothesis that rational individuals can be sufficiently satisfied also at inefficient but less conflictual positions on the contract curve. We also investigate the factors affecting agreeableness, the difficulty in reaching an agreement, and how the cost of inefficiency varies across households and affects intrahousehold inequalities.