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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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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. Kohler, Stefan, 2011. "Altruism and fairness in experimental decisions," Journal of Economic Behavior & Organization, Elsevier, vol. 80(1), pages 101-109.
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  10. Kohler, Stefan, 2012. "More fair play in an ultimatum game after resettlement in Zimbabwe: A field experiment and a structural model," MPRA Paper 40248, University Library of Munich, Germany.
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  16. Kohler, Stefan, 2012. "Envy can promote more equal division in alternating-offer bargaining," MPRA Paper 40761, University Library of Munich, Germany.
  17. 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.
  18. Stefan Kohler, 2012. "Incomplete Information about Social Preferences Explains Equal Division and Delay in Bargaining," Games, MDPI, Open Access Journal, vol. 3(3), pages 119-137, September.
  19. Kohler, Stefan, 2012. "Guilt causes equal or unequal division in alternating-offer bargaining," MPRA Paper 40760, University Library of Munich, Germany.
  20. Engelmann, Dirk, 2012. "How not to extend models of inequality aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 81(2), pages 599-605.
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