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Alternating offers bargaining with loss aversion

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  • Driesen, Bram
  • Perea, Andrés
  • Peters, Hans

Abstract

The Rubinstein alternating offers bargaining game is reconsidered under the assumption that each player is loss averse and the associated reference point is equal to the highest turned down offer of the opponent in the past. This makes the payoffs and therefore potential equilibrium strategies dependent on the history of play. A subgame perfect equilibrium is constructed, in which the strategies depend on the history of play through the current reference points. It is shown that this equilibrium is unique under some assumptions that it shares with the equilibrium in the classical model: immediate acceptance of equilibrium offers, indifference between acceptance and rejection of such offers, and strategies depending only on the current reference points. It is also shown that in this equilibrium loss aversion is a disadvantage. Moreover, a relation with asymmetric Nash bargaining is established, where a player’s bargaining power is negatively related to own loss aversion and positively to the opponent’s loss aversion.

Suggested Citation

  • Driesen, Bram & Perea, Andrés & Peters, Hans, 2012. "Alternating offers bargaining with loss aversion," Mathematical Social Sciences, Elsevier, vol. 64(2), pages 103-118.
    • Handle: RePEc:eee:matsoc:v:64:y:2012:i:2:p:103-118
    DOI: 10.1016/j.mathsocsci.2011.10.010
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    References listed on IDEAS

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    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
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    Cited by:

    1. Stefan Kohler, 2012. "Incomplete Information about Social Preferences Explains Equal Division and Delay in Bargaining," Games, MDPI, Open Access Journal, vol. 3(3), pages 1-19, September.
    2. Kohler, Stefan, 2012. "Envy can promote more equal division in alternating-offer bargaining," MPRA Paper 40761, University Library of Munich, Germany.
    3. Emin Karagözoğlu & Kerim Keskin, 2015. "A Tale of Two Bargaining Solutions," Games, MDPI, Open Access Journal, vol. 6(2), pages 1-14, June.

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