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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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    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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