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Prudence in Bargaining: The Effect of Uncertainty on Bargaining Outcomes

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  • White, Lucy
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    Abstract

    We investigate the outcome of bargaining when a player’s pay-off from agreement is risky. We find that a risk-averse player typically increases his equilibrium receipts when his pay-off is made risky. This is because the presence of risk makes individuals behave 'more patiently' in bargaining. Strong analogies are drawn to the precautionary saving literature. We show that the effect of risk on receipts can be sufficiently strong that a decreasingly risk-averse player may be better off receiving a risky pay-off than a certain pay-off.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5822.

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    Date of creation: Sep 2006
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    Handle: RePEc:cpr:ceprdp:5822

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    Related research

    Keywords: Nash bargaining; prudence; risk aversion; Rubinstein bargaining;

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    1. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
    2. Muellbauer, John, 1994. "The Assessment: Consumer Expenditure," Oxford Review of Economic Policy, Oxford University Press, vol. 10(2), pages 1-41, Summer.
    3. Riddell, W Craig, 1981. "Bargaining under Uncertainty," American Economic Review, American Economic Association, vol. 71(4), pages 579-90, September.
    4. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    5. Safra, Zvi & Zhou, Lin & Zilcha, Itzhak, 1990. "Risk Aversion in the Nash Bargaining Problem with Risky Outcomes and Risky Disagreement Points," Econometrica, Econometric Society, vol. 58(4), pages 961-65, July.
    6. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
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    8. Rosenzweig, Mark R. & Binswanger, Hans P., 1992. "Wealth, weather risk, and the composition and profitability of agricultural investments," Policy Research Working Paper Series 1055, The World Bank.
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    10. Merlo, Antonio & Wilson, Charles A, 1995. "A Stochastic Model of Sequential Bargaining with Complete Information," Econometrica, Econometric Society, vol. 63(2), pages 371-99, March.
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    14. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    15. Yildiz Muhamet, 2002. "Bargaining over Risky Assets," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 2(1), pages 1-28, February.
    16. Roth, Alvin E, 1985. "A Note on Risk Aversion in a Perfect Equilibrium Model of Bargaining," Econometrica, Econometric Society, vol. 53(1), pages 207-11, January.
    17. Alvin E Roth, 2008. "Axiomatic Models of Bargaining," Levine's Working Paper Archive 122247000000002376, David K. Levine.
    18. Prakash, Prem, 1977. "On the consistency of a gambler with time preference," Journal of Economic Theory, Elsevier, vol. 15(1), pages 92-98, June.
    19. Roth, Alvin E, 1989. " Risk Aversion and the Relationship between Nash's Solution and Subgame Perfect Equilibrium of Sequential Bargaining," Journal of Risk and Uncertainty, Springer, vol. 2(4), pages 353-65, December.
    20. Ross, Stephen A, 1981. "Some Stronger Measures of Risk Aversion in the Small and the Large with Applications," Econometrica, Econometric Society, vol. 49(3), pages 621-38, May.
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    22. Martin J. Osborne & Ariel Rubinstein, 2005. "Bargaining and Markets," Levine's Bibliography 666156000000000515, UCLA Department of Economics.
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    Cited by:
    1. White, Lucy, 2008. "Prudence in bargaining: The effect of uncertainty on bargaining outcomes," Games and Economic Behavior, Elsevier, vol. 62(1), pages 211-231, January.

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