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The Focusing Effect in Negotiations

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  • Canidio, Andrea
  • Karle, Heiko

Abstract

Two players with preferences distorted by the focusing effect (Koszegi and Szeidl, 2013) negotiate an agreement over several issues and one transfer. Our main result is that, as long as their preferences are differentially distorted, an issue will be inefficiently left out of the agreement or inefficiently included in the agreement whenever the importance of the other issues on the table is sufficiently large. When this is the case, the salience of the transfer dimension is large for both players, but differentially so, therefore creating a form of disagreement between them. In extreme cases, this could lead to an inefficient breakdown of the negotiation. Anticipating this possibility, the negotiating parties may negotiate in stages, by first signing an incomplete agreement and later finalizing the outcome of the negotiation. As in Raiffa (1982), these incomplete agreements may impose bounds on some dimensions of the bargaining solution in order to reduce their salience.

Suggested Citation

  • Canidio, Andrea & Karle, Heiko, 2021. "The Focusing Effect in Negotiations," CEPR Discussion Papers 15698, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:15698
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    References listed on IDEAS

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    1. Bac, Mehmet & Raff, Horst, 1996. "Issue-by-Issue Negotiations: The Role of Information and Time Preference," Games and Economic Behavior, Elsevier, vol. 13(1), pages 125-134, March.
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    4. Markus Dertwinkel-Kalt & Holger Gerhardt & Gerhard Riener & Frederik Schwerter & Louis Strang, 2021. "Concentration Bias in Intertemporal Choice," CESifo Working Paper Series 9011, CESifo.
    5. Lutz-Alexander Busch & Ignatius Horstmann, 1999. "Endogenous Incomplete Contracts: A Bargaining Approach," Canadian Journal of Economics, Canadian Economics Association, vol. 32(4), pages 956-975, August.
    6. Auster, Sarah, 2013. "Asymmetric awareness and moral hazard," Games and Economic Behavior, Elsevier, vol. 82(C), pages 503-521.
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    Cited by:

    1. Markus Dertwinkel-Kalt & Holger Gerhardt & Gerhard Riener & Frederik Schwerter & Louis Strang, 2021. "Concentration Bias in Intertemporal Choice," CESifo Working Paper Series 9011, CESifo.

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    More about this item

    Keywords

    Bargaining; Focusing Effect; Incomplete Agreements; negotiations; Salience;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

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