Expectations matter in bottom-line setting: Theory and evidence

Peikun Chen, Jianbiao Li, Jingjing Pan and Chengkang Zhu

Journal of Economic Behavior & Organization, 2025, vol. 231, issue C

Abstract: The bottom-line, or minimum acceptable offer (MAO), is a crucial concept in real-world economic negotiations. This study demonstrated a causal relationship between responders’ expectations of proposers’ offer and their MAOs setting, in a controlled ultimatum game. We develop three theoretical models (reference dependence, frustration aversion and bounded rationality) to further investigate the underlying mechanism. By considering two distinct scenarios - responders setting MAOs before and after knowing the proposer's offer - we generate distinguishable predictions from our models. We then conduct two experiments to test these predictions, exogenously manipulating subjects’ offer expectations and comparing the observed shifts in MAOs to our theoretical predictions. Our findings indicate that bounded rationality significantly contributes to the causal effect of responders’ expectations on their MAOs, providing a new perspective on how expectations shape bargaining behavior. Furthermore, our results help reconcile divergent findings under the strategy method and direct-response method, highlighting the effects of expectations as a key driver alongside emotion.

Keywords: Minimum acceptable offer; Expectation; Bounded rationality; Strategy method (search for similar items in EconPapers)
JEL-codes: C91 D01 D91 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:231:y:2025:i:c:s0167268125000642

DOI: 10.1016/j.jebo.2025.106944

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