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Inequality aversion causes equal or unequal division in alternating-offer bargaining

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  • Kohler, Stefan

Abstract

This note presents a solution to Rubinstein (1982)'s open-ended, alternating-offer bargaining problem for two equally patient bargainers that exhibit similar degrees of inequality aversion. Inequality-averse bargainers may perceive envy if being worse off and guilt if being better off, but they still reach agreement in the first period under complete information. If the perceived guilt is strong, then the inequality-averse bargainers split the bargaining surplus equally regardless of their degree of envy. If guilt is weak, then the agreed split is tilted away from the Rubinstein division towards a more unequal split. Envy and weak guilt have opposite effects on the bargaining outcome, and envy has a greater marginal impact than weak guilt. Similarly inequality-averse bargainers agree on the Rubinstein division if the strength of envy equals the discounted strength of guilt. As both bargainers sensation of inequality aversion diminishes, the bargaining outcome converges to the Rubinstein division.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40764.

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Date of creation: 06 Jul 2013
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Handle: RePEc:pra:mprapa:40764

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Keywords: alternating offers; bargaining; bargaining power; behavioral economics; envy; equity; fairness; guilt; negotiation; social preferences;

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  1. Goeree, Jacob K. & Holt, Charles A., 2000. "Asymmetric inequality aversion and noisy behavior in alternating-offer bargaining games," European Economic Review, Elsevier, Elsevier, vol. 44(4-6), pages 1079-1089, May.
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  4. MAULEON, Ana & VANNETELBOSCH, Vincent, 2013. "Relative concerns and delays in bargaining with private information," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2013034, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Kohler, Stefan, 2012. "Envy can promote more equal division in alternating-offer bargaining," MPRA Paper, University Library of Munich, Germany 40761, University Library of Munich, Germany.
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  13. Kohler, Stefan, 2012. "Guilt causes equal or unequal division in alternating-offer bargaining," MPRA Paper, University Library of Munich, Germany 40760, University Library of Munich, Germany.
  14. Stefan Kohler, 2012. "Incomplete Information about Social Preferences Explains Equal Division and Delay in Bargaining," Games, MDPI, Open Access Journal, MDPI, Open Access Journal, vol. 3(3), pages 119-137, September.
  15. Kohler, Stefan, 2012. "More fair play in an ultimatum game after resettlement in Zimbabwe: A field experiment and a structural model," MPRA Paper, University Library of Munich, Germany 40248, University Library of Munich, Germany.
  16. Bellemare, C. & Kroger, S. & Soest, A.H.O. van, 2008. "Measuring inequity aversion in a heterogeneous population using experimental decisions and subjective probabilities," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-376716, Tilburg University.
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Cited by:
  1. Stefan Kohler, 2014. "Guilt causes equal or unequal division in alternating-offer bargaining," Economics Bulletin, AccessEcon, AccessEcon, vol. 34(3), pages 1611-1617.

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