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Nash-Bargained Consumption Decisions: A Revealed Preference Analysis

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Author Info

  • Laurens Cherchye
  • Thomas Demuynck
  • Bram De Rock

Abstract

We present a revealed preference analysis of the testable implications of the Nash bargaining solution. Our specific focus is on a two-player game involving consumption decisions. We consider a setting in which the empirical analyst has information on both the threat points bundles and the bargaining outcomes. We first establish a revealed preference characterization of the Nash bargaining solution. This characterization implies conditions that are both necessary and sufficient for consistency of observed consumption behavior with the Nash bargaining model. However, these conditions turn out to be nonlinear in unknowns and therefore difficult to verify. Given this, we subsequently present necessary conditions and sufficient conditions that are linear (and thus easily testable). We illustrate the practical usefulness of these conditions by means of an application to experimental data. Such an experimental setting implies a most powerful analysis of the empirical goodness of the Nash bargaining model for describing consumption decisions. To our knowledge, this provides a first empirical test of the Nash bargaining model on consumption data. Finally, we consider the possibility that threat point bundles are not observed. This obtains testable conditions for the Nash bargaining model that can be used in non-experimental (e.g. household consumption) settings, which often do not contain information on individual consumption bundles in threat points.

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Bibliographic Info

Paper provided by ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/131704.

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Date of creation: 2012
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Publication status: Forthcoming
Handle: RePEc:ulb:ulbeco:2013/131704

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Cited by:
  1. Susan Snyder & Indrajit Ray, 2004. "Observable implications of Nash and subgame-perfect behavior in extensive games," Econometric Society 2004 North American Summer Meetings, Econometric Society 407, Econometric Society.
  2. Carvajal, Andrés & González, Natalia, 2014. "On refutability of the Nash bargaining solution," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 177-186.
  3. Echenique, Federico & Chambers, Christopher P., 2014. "On the consistency of data with bargaining theories," Theoretical Economics, Econometric Society, Econometric Society, vol. 9(1), January.

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