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Bargaining, Interdependence and the Rationality of Fair Division

  • Giuseppe Lopomo
  • Efe A Ok

We consider two-person bargaining games with interdependent preferences and bilateral incomplete information. We show that in both the ultimatum game and the two-stage alternating-offers game, our equilibrium predictions are consistent with a number of robust experimental regularities that falsify the standard game theoretic model: occurrence of disagreements, disadvantageous counteroffers, and outcomes that come close to the equal split of the pie. In the context of infinite-horizon bargaining, the implications of the model pertaining to fair outcomes is even stronger. In particular, the Coase property in our case generates "almost" 50-50 splits of the pie, almost immediately. The present approach thus provides a positive theory for the frequently encountered phenomenon of the 50-50 division of the gains from trade. Copyright 2001 by the RAND Corporation.

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Date of creation: 20 May 2001
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Handle: RePEc:cla:levarc:563824000000000114
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  8. In-Koo Cho, 1990. "Uncertainty and Delay in Bargaining," Review of Economic Studies, Oxford University Press, vol. 57(4), pages 575-595.
  9. Daughety, A.F., 1993. "Socially-Influenced Choice : Equity Considerations in Models of Consumer Choice and Games," Working Papers 93-01, University of Iowa, Department of Economics.
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  16. Guth, Werner & Schmittberger, Rolf & Schwarze, Bernd, 1982. "An experimental analysis of ultimatum bargaining," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 367-388, December.
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  19. Colin F. Camerer & Richard H. Thaler, 1995. "Anomalies: Ultimatums, Dictators and Manners," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 209-219, Spring.
  20. Herrero, Maria Jose, 1989. "The nash program: Non-convex bargaining problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 266-277, December.
  21. Bolton, Gary E., 1997. "The rationality of splitting equally," Journal of Economic Behavior & Organization, Elsevier, vol. 32(3), pages 365-381, March.
  22. Matthew Rabin., 1997. "Psychology and Economics," Economics Working Papers 97-251, University of California at Berkeley.
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