Bargaining, Interdependence, and the Rationality of Fair Division

Giuseppe (Pino) Lopomo and Efe Ok

RAND Journal of Economics, 2001, vol. 32, issue 2, 263-83

Abstract: We consider two-person bargaining games with interdependent preferences and bilateral incomplete information. We show that in both the ultimatum game and the two-stage alternating-offers game, our equilibrium predictions are consistent with a number of robust experimental regularities that falsify the standard game theoretic model: occurrence of disagreements, disadvantageous counteroffers, and outcomes that come close to the equal split of the pie. In the context of infinite-horizon bargaining, the implications of the model pertaining to fair outcomes is even stronger. In particular, the Coase property in our case generates "almost" 50-50 splits of the pie, almost immediately. The present approach thus provides a positive theory for the frequently encountered phenomenon of the 50-50 division of the gains from trade. Copyright 2001 by the RAND Corporation.

Date: 2001
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