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Alternating offers bargaining with loss aversion

  • Driesen Bram
  • Perea Andrés
  • Peters Hans

    (METEOR)

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 throughthe 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 Nashbargaining 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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Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 001.

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Date of creation: 2009
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Handle: RePEc:unm:umamet:2009001
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  1. Peters, Hans, 2012. "A preference foundation for constant loss aversion," Journal of Mathematical Economics, Elsevier, vol. 48(1), pages 21-25.
  2. Admati, Anat R & Perry, Motty, 1991. "Joint Projects without Commitment," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 259-76, April.
  3. Shaked, Avner & Sutton, John, 1984. "Involuntary Unemployment as a Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 52(6), pages 1351-64, November.
  4. Jonathan Shalev, 1996. "Loss Aversion and Bargaining," Game Theory and Information 9606001, EconWPA, revised 18 Mar 1997.
  5. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  6. 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.
  7. Safra Zvi & Zilcha Itzhak, 1993. "Bargaining Solutions without the Expected Utility Hypothesis," Games and Economic Behavior, Elsevier, vol. 5(2), pages 288-306, April.
  8. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
  9. 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.
  10. Peters Hans & Köbberling Vera, 2000. "The Effect of Decision Weights in Bargaining Problems," Research Memorandum 037, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  11. Roth, Alvin E, 1985. "A Note on Risk Aversion in a Perfect Equilibrium Model of Bargaining," Econometrica, Econometric Society, vol. 53(1), pages 207-11, January.
  12. 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.
  13. Kyle Hyndman, 2011. "Repeated bargaining with reference-dependent preferences," International Journal of Game Theory, Springer, vol. 40(3), pages 527-549, August.
  14. 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.
  15. Li, Duozhe, 2007. "Bargaining with history-dependent preferences," Journal of Economic Theory, Elsevier, vol. 136(1), pages 695-708, September.
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