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On Risk Aversion in the Rubinstein Bargaining Game

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  • Kohlscheen, Emanuel

    (Department of Economics, University of Warwick,)

  • O’Connell, Stephen

    (Department of Economics, Swarthmore College,)

Abstract

We derive closed-form solutions for the Rubinstein alternating offers game for cases where the two players have (possibly asymmetric) utility functions that belong to the HARA class and discount the future at a constant rate. We show that risk aversion may increase a bargainers payoff. This result - which contradicts Roth’s 1985 theorem tying greater risk neutrality to a smaller payoff - does not rely on imperfect information or departures from expected utility maximization.

Suggested Citation

  • Kohlscheen, Emanuel & O’Connell, Stephen, 2008. "On Risk Aversion in the Rubinstein Bargaining Game," The Warwick Economics Research Paper Series (TWERPS) 878, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:878
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_878.pdf
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    References listed on IDEAS

    as
    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Roth, Alvin E, 1985. "A Note on Risk Aversion in a Perfect Equilibrium Model of Bargaining," Econometrica, Econometric Society, vol. 53(1), pages 207-211, January.
    3. 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.
    4. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, number 9780521576475.
    5. Volij, Oscar & Winter, Eyal, 2002. "On risk aversion and bargaining outcomes," Games and Economic Behavior, Elsevier, vol. 41(1), pages 120-140, October.
    6. Roth, Alvin E, 1989. "Risk Aversion and the Relationship between Nash's Solution and Subgame Perfect Equilibrium of Sequential Bargaining," Journal of Risk and Uncertainty, Springer, vol. 2(4), pages 353-365, December.
    7. Binmore, Ken & Osborne, Martin J. & Rubinstein, Ariel, 1992. "Noncooperative models of bargaining," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.),Handbook of Game Theory with Economic Applications, edition 1, volume 1, chapter 7, pages 179-225, Elsevier.
    8. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-178, February.
    9. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    10. Roth, Alvin E & Rothblum, Uriel G, 1982. "Risk Aversion and Nash's Solution for Bargaining Games with Risky Outcomes," Econometrica, Econometric Society, vol. 50(3), pages 639-647, May.
    11. Binmore, Ken, 2007. "Playing for Real: A Text on Game Theory," OUP Catalogue, Oxford University Press, number 9780195300574.
    12. Ken Binmore, 2007. "Does Game Theory Work? The Bargaining Challenge," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262026074, December.
    13. Shaked, Avner & Sutton, John, 1984. "Involuntary Unemployment as a Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 52(6), pages 1351-1364, November.
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