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Alternating offers bargaining with loss aversion

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Listed author(s):
  • 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.

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File URL: http://www.sciencedirect.com/science/article/pii/S0165489611001193
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Article provided by Elsevier in its journal Mathematical Social Sciences.

Volume (Year): 64 (2012)
Issue (Month): 2 ()
Pages: 103-118

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Handle: RePEc:eee:matsoc:v:64:y:2012:i:2:p:103-118
DOI: 10.1016/j.mathsocsci.2011.10.010
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505565

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  1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
  2. Roth, Alvin E, 1985. "A Note on Risk Aversion in a Perfect Equilibrium Model of Bargaining," Econometrica, Econometric Society, vol. 53(1), pages 207-211, January.
  3. Ken Binmore & Ariel Rubinstein & Asher Wolinsky, 1986. "The Nash Bargaining Solution in Economic Modelling," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 176-188, Summer.
  4. 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.
  5. Jonathan Shalev, 2002. "Loss Aversion and Bargaining," Theory and Decision, Springer, vol. 52(3), pages 201-232, May.
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  7. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  8. Safra Zvi & Zilcha Itzhak, 1993. "Bargaining Solutions without the Expected Utility Hypothesis," Games and Economic Behavior, Elsevier, vol. 5(2), pages 288-306, April.
  9. Jesse A. Schwartz & Quan Wen, 2007. "Wage Negotiation Under Good Faith Bargaining," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 9(03), pages 551-564.
  10. Anat R. Admati & Motty Perry, 1991. "Joint Projects without Commitment," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 259-276.
  11. Kyle Hyndman, 2011. "Repeated bargaining with reference-dependent preferences," International Journal of Game Theory, Springer;Game Theory Society, vol. 40(3), pages 527-549, August.
  12. Hendon, Ebbe & Jacobsen, Hans Jorgen & Sloth, Birgitte, 1996. "The One-Shot-Deviation Principle for Sequential Rationality," Games and Economic Behavior, Elsevier, vol. 12(2), pages 274-282, February.
  13. John C. Harsanyi & Reinhard Selten, 1972. "A Generalized Nash Solution for Two-Person Bargaining Games with Incomplete Information," Management Science, INFORMS, vol. 18(5-Part-2), pages 80-106, January.
  14. Li, Duozhe, 2007. "Bargaining with history-dependent preferences," Journal of Economic Theory, Elsevier, vol. 136(1), pages 695-708, September.
  15. Shaked, Avner & Sutton, John, 1984. "Involuntary Unemployment as a Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 52(6), pages 1351-1364, November.
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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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