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Make Him an Offer He Can’t Refuse: Avoiding Conflicts through Side Payments

  • Erik O. Kimbrough

    ()

    (Department of Economics (AE1), School of Business and Economics, Maastricht University)

  • Roman Sheremeta

    (Argyros School of Business and Economics, Chapman University)

The equilibrium of a two-stage conflict game with side-payments predicts that with binding stage-one offers, proposers make and responders accept side-payments, generating settlements that strongly favor proposers. When side-payments are non-binding, proposers offer nothing and conflicts always arise. Laboratory experiments confirm that binding side-payments reduce conflicts. However, 30% of responders reject binding offers, and offers are more egalitarian than predicted. Surprisingly, non-binding side-payments also improve efficiency, although less than binding. With binding side-payments, 98% of efficiency gains come from avoided conflicts. However, with non-binding side-payments, only 49% of gains come from avoided conflicts and 51% from reduced conflict expenditures.

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File URL: http://www.chapman.edu/ESI/wp/Kimbrough-Sheremeta-MakeHimAnOffer.pdf
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Paper provided by Chapman University, Economic Science Institute in its series Working Papers with number 10-23.

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Length: 30 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:chu:wpaper:10-23
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