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The effect of decision weights in bargaining problems

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  • Kobberling, Veronika
  • Peters, Hans

Abstract

Bargaining problems are considered where the preferences of the bargainers deviate from expected utility but can be modelled according to rank dependent utility theory. Under rank dependent utility two factors influence the risk attitude of a decision maker: the utility function and the probability weighting function. Arising from the same definition of risk aversion, two forms of risk aversion can be distinguished: utility risk aversion and probabilistic risk aversion.The main finding is that these two forms of risk aversion can have surprisingly opposite consequences for bargaining solutions that exhibit a weak monotonicity property. In particular, in a large class of bargaining problems both increased utility risk aversion and decreased probabilistic risk aversion of the opponent are advantagous for a player. This is demonstrated for the Kalai-Smorodinsky bargaining solution. The Nash bargaining solution does not behave regularly in this respect.
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  • 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.
  • Handle: RePEc:eee:jetheo:v:110:y:2003:i:1:p:154-175
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    Cited by:

    1. Caroline Berden & Hans Peters, 2006. "On the Effect of Risk Aversion in Bimatrix Games," Theory and Decision, Springer, vol. 60(4), pages 359-370, June.
    2. Cressman, Ross & Gallego, Maria, 2009. "On the ranking of bilateral bargaining opponents," Mathematical Social Sciences, Elsevier, vol. 58(1), pages 64-83, July.
    3. Driesen, Bram & Lombardi, Michele & Peters, Hans, 2016. "Feasible sets, comparative risk aversion, and comparative uncertainty aversion in bargaining," Journal of Mathematical Economics, Elsevier, vol. 67(C), pages 162-170.
    4. Berden Caroline & Peters Hans, 2008. "On the Effect of Risk Aversion in Two-Person, Two-State Finance Economies," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 7(1), pages 1-18, January.
    5. Craig Webb, 2013. "Bargaining with subjective mixtures," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(1), pages 15-39, January.
    6. Driesen, Bram & Perea, Andrés & Peters, Hans, 2012. "Alternating offers bargaining with loss aversion," Mathematical Social Sciences, Elsevier, vol. 64(2), pages 103-118.
    7. 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.

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