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Bargaining with a residual claimant: An experimental study

Matthew Embrey, Kyle Hyndman and Arno Riedl

Games and Economic Behavior, 2021, vol. 126, issue C, 335-354

Abstract: Many negotiations involve risks that are resolved ex-post. Often these risks are not incurred equally by the parties involved. We experimentally investigate bargaining situations where a residual claimant faces ex-post risk, whereas a fixed-payoff player does not. Consistent with a benchmark model, we find that residual claimants extract a risk premium, which increases in risk exposure. This premium can be high enough to make it beneficial to bargain over a risky rather than a risk-less pie. Contrary to the model's predictions, we find that the comparatively less risk averse residual claimants benefit the most from risk exposure. This is because fixed-payoff players' adopt weak bargaining strategies when the pie is risky. We find evidence for a behavioural mechanism where asymmetric exposure to risk between the two parties creates a wedge between their fairness ideas, which shifts agreements in favour of residual claimants but also increases bargaining friction.

Keywords: Bargaining; Ex-post risk; Reference points (search for similar items in EconPapers)
JEL-codes: C71 C92 D81 (search for similar items in EconPapers)
Date: 2021
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Related works:
Working Paper: Bargaining with a Residual Claimant: An Experimental Study (2020) Downloads
Working Paper: Bargaining with a Residual Claimant: An Experimental Study (2019) Downloads
Working Paper: Bargaining with a Residual Claimant: An Experimental Study (2014) Downloads
Working Paper: Bargaining with a residual claimant: An experimental study (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:126:y:2021:i:c:p:335-354

DOI: 10.1016/j.geb.2020.12.005

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