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Prudence in Bargaining: The Effect of Uncertainty on Bargaining Outcomes

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Author Info
White, Lucy
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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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;

Find related papers by JEL classification:
C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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  20. Martin J. Osborne & Ariel Rubinstein, 2005. "Bargaining and Markets," Levine's Bibliography 666156000000000515, UCLA Department of Economics. [Downloadable!]
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