Risk-Averse Bargaining in a Stochastic Optimization Context

Walter J. Gutjahr (), Raimund M. Kovacevic () and David Wozabal ()
Additional contact information
Walter J. Gutjahr: Department of Statistics and Operations Research, University of Vienna, 1090 Vienna, Austria
Raimund M. Kovacevic: Center for Evidence-based Health Economics, Danube University, 3500 Krems, Austria; Institute of Statistics and Mathematical Methods in Economics, Vienna University of Technology, 1040 Vienna, Austria
David Wozabal: School of Management, Technische Universität München, 80333 Munich, Germany

Manufacturing & Service Operations Management, 2023, vol. 25, issue 1, 323-340

Abstract: Problem definition : Bargaining situations are ubiquitous in economics and management. We consider the problem of bargaining for a fair ex ante distribution of random profits arising from a cooperative effort of a fixed set of risk-averse agents. Our approach integrates optimal managerial decision making into bargaining situations with random outcomes and explicitly models the impact of risk aversion. The proposed solution rests on a firm axiomatic foundation and yet allows to compute concrete bargaining solutions for a wide range of practically relevant problems. Methodology/results : We model risk preferences using coherent acceptability functionals and base our bargaining solution on a set of axioms that can be considered a natural extension of Nash bargaining to our setting. We show that the proposed axioms fully characterize a bargaining solution, which can be efficiently computed by solving a stochastic optimization problem. We characterize special cases where random payoffs of players are simple functions of overall project profit. In particular, we show that, for players with distortion risk functionals, the optimal bargaining solution can be represented by an exchange of standard options contracts with the project profit as the underlying asset. We illustrate the concepts in the paper with a detailed example of risk-averse households that jointly invest into a solar plant. Managerial implications : We demonstrate that there is no conflict of interest between players about management decisions and that risk aversion facilitates cooperation. Furthermore, our results on the structure of optimal contracts as a basket of option contracts provides valuable guidance for negotiators.

Keywords: stochastic bargaining games; coherent risk measures; stochastic programming; photovoltaics (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/msom.2021.1076 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:25:y:2023:i:1:p:323-340

Access Statistics for this article

More articles in Manufacturing & Service Operations Management from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().