Loss Aversion and Bargaining
AbstractWe consider bargaining situations where two players evaluate outcomes with reference-dependent utility functions, analyzing the effect of differing levels of loss aversion on bargaining outcomes. We find that as with risk aversion, increasing loss aversion for a player leads to worse outcomes for that player in bargaining situations. An extension of Nash's axioms is used to define a solution for bargaining problems with exogenous reference points. Using this solution concept we endogenize the reference points into the model and find a unique solution giving reference points and outcomes that satisfy two reasonable properties, which we predict would be observed in a steady state. The resulting solution also emerges in two other approaches, a strategic (non- cooperative) approach using Rubinstein's alternating offers model and a dynamic approach in which we find that even under weak assumptions, outcomes and reference points converge to the steady state solution from any non-equilibrium state.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series Game Theory and Information with number 9606001.
Length: 30 pages
Date of creation: 05 Jun 1996
Date of revision: 18 Mar 1997
Note: 30 pages, LaTeX. New version from 7/97.
Contact details of provider:
Web page: http://126.96.36.199
loss aversion; bargaining; reference dependence;
Other versions of this item:
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Matthew Rabin, 1998.
"Psychology and Economics,"
Journal of Economic Literature,
American Economic Association, vol. 36(1), pages 11-46, March.
- Matthew Rabin., 1997. "Psychology and Economics," Economics Working Papers 97-251, University of California at Berkeley.
- Rabin, Matthew, 1997. "Psychology and Economics," Department of Economics, Working Paper Series qt8jd5z5j2, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Thomson, W., 1989.
"Cooperative Models Of Bargaining,"
RCER Working Papers
177, University of Rochester - Center for Economic Research (RCER).
- Thomson, William, 1994. "Cooperative models of bargaining," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 2, chapter 35, pages 1237-1284 Elsevier.
- Kahneman, Daniel, 1992. "Reference points, anchors, norms, and mixed feelings," Organizational Behavior and Human Decision Processes, Elsevier, vol. 51(2), pages 296-312, March.
- Martin J. Osborne & Ariel Rubinstein, 2005. "Bargaining and Markets," Levine's Bibliography 666156000000000515, UCLA Department of Economics.
- Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December.
- Nash, John, 1953. "Two-Person Cooperative Games," Econometrica, Econometric Society, vol. 21(1), pages 128-140, April.
- Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
- Rubinstein, Ariel & Safra, Zvi & Thomson, William, 1992. "On the Interpretation of the Nash Bargaining Solution and Its Extension to Non-expected Utility Preferences," Econometrica, Econometric Society, vol. 60(5), pages 1171-86, September.
- Sobel, Joel, 1981. "Distortion of Utilities and the Bargaining Problem," Econometrica, Econometric Society, vol. 49(3), pages 597-619, May.
- Neale, Margaret A. & Huber, Vandra L. & Northcraft, Gregory B., 1987. "The framing of negotiations: Contextual versus task frames," Organizational Behavior and Human Decision Processes, Elsevier, vol. 39(2), pages 228-241, April.
- Alvin E Roth, 2008. "Axiomatic Models of Bargaining," Levine's Working Paper Archive 122247000000002376, David K. Levine.
- Kalai, Ehud & Smorodinsky, Meir, 1975. "Other Solutions to Nash's Bargaining Problem," Econometrica, Econometric Society, vol. 43(3), pages 513-18, May.
- Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
- Kannai, Yakar, 1977. "Concavifiability and constructions of concave utility functions," Journal of Mathematical Economics, Elsevier, vol. 4(1), pages 1-56, March.
- Roth, Alvin E & Rothblum, Uriel G, 1982. "Risk Aversion and Nash's Solution for Bargaining Games with Risky Outcomes," Econometrica, Econometric Society, vol. 50(3), pages 639-47, May.
- Ariel Rubinstein, 2010.
"Perfect Equilibrium in a Bargaining Model,"
Levine's Working Paper Archive
661465000000000387, David K. Levine.
- Amos Tversky & Daniel Kahneman, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Levine's Working Paper Archive
7656, David K. Levine.
- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
- Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
- Bazerman, Max H. & Magliozzi, Thomas & Neale, Margaret A., 1985. "Integrative bargaining in a competitive market," Organizational Behavior and Human Decision Processes, Elsevier, vol. 35(3), pages 294-313, June.
- Anton Suvorov & Jeroen van de Ven, 2008. "Goal Setting as a Self-Regulation Mechanism," Working Papers w0122, Center for Economic and Financial Research (CEFIR).
- Breitmoser, Yves & Tan, Jonathan H.W., 2011. "Ultimata bargaining: generosity without social motives," MPRA Paper 33613, University Library of Munich, Germany.
- Breitmoser, Yves & Tan, Jonathan H.W., 2010. "Generosity in bargaining: Fair or fear?," MPRA Paper 27444, University Library of Munich, Germany.
- Laurence Kranich & Andrés Perea & Hans Peters, 2005.
"Core Concepts For Dynamic Tu Games,"
International Game Theory Review (IGTR),
World Scientific Publishing Co. Pte. Ltd., vol. 7(01), pages 43-61.
- Kranich,Laurence & Peree,Andrea & Peters,Hans, 2001. "Core Concepts for Dynamic TU Games," Research Memoranda 013, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization.
- Kranich, Laurence & Perea, Andres & Peters, Hans, 2005. "Core concepts for dynamic TU games," Open Access publications from Maastricht University urn:nbn:nl:ui:27-12229, Maastricht University.
- Ciccarone, Giuseppe & Giuli, Francesco & Marchetti, Enrico, 2013. "Power or loss aversion? Reinterpreting the bargaining weights in search and matching models," Economics Letters, Elsevier, vol. 118(2), pages 375-377.
- Driesen, Bram & Perea, Andrés & Peters, Hans, 2012.
"Alternating offers bargaining with loss aversion,"
Mathematical Social Sciences,
Elsevier, vol. 64(2), pages 103-118.
- Giuseppe Ciccarone & Francesco Giuli & Enrico Marchetti, 2013. "Imperfect rationality, macroeconomic equilibrium and price rigidities," Departmental Working Papers of Economics - University 'Roma Tre' 0183, Department of Economics - University Roma Tre.
- Kobberling, Veronika & Peters, Hans, 2003.
"The effect of decision weights in bargaining problems,"
Journal of Economic Theory,
Elsevier, vol. 110(1), pages 154-175, May.
- Peters,Hans & Köbberling,Vera, 2000. "The Effect of Decision Weights in Bargaining Problems," Research Memoranda 037, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization.
- Kobberling, Veronika & Peters, Hans, 2003. "The effect of decision weights in bargaining problems," Open Access publications from Maastricht University urn:nbn:nl:ui:27-12234, Maastricht University.
- Viaene, Stijn & Veugelers, Reinhilde & Dedene, Guido, 2002. "Insurance bargaining under risk aversion," Economic Modelling, Elsevier, vol. 19(2), pages 245-259, March.
- Driesen Bram & Perea Andrés & Peters Hans, 2009.
"The Kalai-Smorodinsky Solution with Loss Aversion,"
030, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization.
- Driesen, Bram & Perea, Andrés & Peters, Hans, 2011. "The Kalai-Smorodinsky bargaining solution with loss aversion," Mathematical Social Sciences, Elsevier, vol. 61(1), pages 58-64, January.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If references are entirely missing, you can add them using this form.