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Nash‐Bargained Consumption Decisions: A Revealed Preference Analysis

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  • 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.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Laurens Cherchye & Thomas Demuynck & Bram De Rock, 2013. "Nash‐Bargained Consumption Decisions: A Revealed Preference Analysis," Economic Journal, Royal Economic Society, vol. 123, pages 195-235, March.
  • Handle: RePEc:ecj:econjl:v:123:y:2013:i::p:195-235
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    Cited by:

    1. Sam Cosaert & Thomas Demuynck, 2015. "Revealed preference theory for finite choice sets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 59(1), pages 169-200, May.
    2. Ian Crawford & Bram De Rock, 2014. "Empirical Revealed Preference," Annual Review of Economics, Annual Reviews, vol. 6(1), pages 503-524, August.
    3. Carvajal, Andrés & González, Natalia, 2014. "On refutability of the Nash bargaining solution," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 177-186.
    4. Ray, Indrajit & Snyder, Susan, 2013. "Observable implications of Nash and subgame-perfect behavior in extensive games," Journal of Mathematical Economics, Elsevier, vol. 49(6), pages 471-477.
    5. repec:eee:trapol:v:59:y:2017:i:c:p:181-195 is not listed on IDEAS
    6. Ori Zax, 2015. "Human Capital And The Probability Of Divorce," Bulletin of Economic Research, Wiley Blackwell, vol. 67(S1), pages 111-134, December.
    7. Salvador Bertomeu & Antonio Estache, 2016. "Unbundling Political and Economic Rationality: a Non-Parametric Approach Tested on Spain," Working Papers ECARES ECARES 2016-17, ULB -- Universite Libre de Bruxelles.
    8. Echenique, Federico & Chambers, Christopher P., 2014. "On the consistency of data with bargaining theories," Theoretical Economics, Econometric Society, vol. 9(1), January.

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