Inequality aversion causes equal or unequal division in alternating-offer bargaining
AbstractThis 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 InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 40764.
Date of creation: 06 Jul 2013
Date of revision:
alternating offers; bargaining; bargaining power; behavioral economics; envy; equity; fairness; guilt; negotiation; social preferences;
Find related papers by JEL classification:
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
- D3 - Microeconomics - - Distribution
- D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-07-15 (All new papers)
- NEP-EVO-2013-07-15 (Evolutionary Economics)
- NEP-EXP-2013-07-15 (Experimental Economics)
- NEP-GTH-2013-07-15 (Game Theory)
- NEP-MIC-2013-07-15 (Microeconomics)
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