The effect of options to reward and punish on behavior in bargaining

Svetlana Pevnitskaya and Dmitry Ryvkin

Journal of Economics & Management Strategy, 2022, vol. 31, issue 1, 171-192

Abstract: We use a lab experiment to investigate how providing the responder with options to reward and/or punish the proposer postacceptance affects behavior in ultimatum bargaining. We find that the presence of costly reward and punishment options affects behavior of both bargaining parties, even if those instruments are rarely used. Proposers are most generous when responders can both reward and punish, and offer least (even compared to the baseline) when responders can only reward. The likelihood of acceptance by responders, conditional on offer size, increases. The least generous offers have the highest chance of being accepted in the presence of punishment alone, even when punishment is not applied. It appears that the availability of additional instruments changes subjects' perception of the distribution of bargaining power and shifts fairness norms. The results have implications for optimal contract design in posted offer settings, such as decentralized online marketplaces for various tasks.

Date: 2022
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