Prudence in Bargaining: The Effect of Uncertainty on Bargaining Outcomes

Lucy White

No 5822, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We investigate the outcome of bargaining when a player?s pay-off from agreement is risky. We find that a risk-averse player typically increases his equilibrium receipts when his pay-off is made risky. This is because the presence of risk makes individuals behave 'more patiently' in bargaining. Strong analogies are drawn to the precautionary saving literature. We show that the effect of risk on receipts can be sufficiently strong that a decreasingly risk-averse player may be better off receiving a risky pay-off than a certain pay-off.

Keywords: Nash bargaining; Rubinstein bargaining; Risk aversion; Prudence (search for similar items in EconPapers)
JEL-codes: C71 C72 C78 D80 (search for similar items in EconPapers)
Date: 2006-09
New Economics Papers: this item is included in nep-gth and nep-upt
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Citations: View citations in EconPapers (8)

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