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Illustrated Examples of the Effects of Risk Preferences and Expectations on Bargaining Outcomes

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  • David L. Dickinson

Abstract

The author highlights bargaining examples that use expected utility theory. Bargainer payoffs in the event of a dispute are represented by a simple lottery. Expectations are assumed to affect a bargainer's subjective probabilities over lottery outcomes, and risk preferences affect the expected utility of a given lottery. Risk preferences and/or expectations are predicted to influence both negotiated outcomes and the likelihood of a bargaining impasse. The analysis shows that, ceteris paribus , risk aversion or pessimism, or both, will cause a bargainer to capture less of the pie in negotiations. Similarly, risk-loving and optimistic bargainers are more likely to experience impasse because of the disappearance of the contract zone. The results are intuitive, can be shown graphically and algebraically, and provide upper-level students with engaging examples that show the usefulness of expected utility theory.

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  • David L. Dickinson, 2003. "Illustrated Examples of the Effects of Risk Preferences and Expectations on Bargaining Outcomes," The Journal of Economic Education, Taylor & Francis Journals, vol. 34(2), pages 169-180, January.
  • Handle: RePEc:taf:jeduce:v:34:y:2003:i:2:p:169-180 DOI: 10.1080/00220480309595210
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    1. Charles A. Holt & Monica Capra, 2000. "Classroom Games: A Prisoner's Dilemma," The Journal of Economic Education, Taylor & Francis Journals, vol. 31(3), pages 229-236, September.
    2. Reinhard Selten, 1973. "A Simple Model of Imperfect Competition, where 4 are Few and 6 are Many," Center for Mathematical Economics Working Papers 008, Center for Mathematical Economics, Bielefeld University.
    3. Nagel, Rosemarie, 1995. "Unraveling in Guessing Games: An Experimental Study," American Economic Review, American Economic Association, pages 1313-1326.
    4. Brauer, Jurgen & Delemeester, Greg, 2001. " Games Economists Play: A Survey of Non-computerized Classroom-Games for College Economics," Journal of Economic Surveys, Wiley Blackwell, vol. 15(2), pages 221-236, April.
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    Cited by:

    1. Charness, Gary & Kuhn, Peter, 2011. "Lab Labor: What Can Labor Economists Learn from the Lab?," Handbook of Labor Economics, Elsevier.
    2. repec:hal:journl:halshs-00881151 is not listed on IDEAS

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