Loss aversion and bargaining

Jonathan Shalev (jonathan.shalev@gmail.com)

No 1997006, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: We consider bargaining situations where two players evaluate outcomes with reference-dependent utility functions, analyzing the effect of differing levels of loss aversion on bargaining outcomes. We find that as with risk aversion, increasing loss aversion for a player leads to worse outcomes for that player in bargaining situations. An extension of Nash’s axioms is used to define a solution for bargaining problems with exogenous reference points. Using this solution concept we endogenize the reference points into the model and find a unique solution giving reference points and outcomes that satisfy two reasonable properties, which we predict would be observed in a steady state. The resulting solution also emerges in two other approaches, a strategic (non-cooperative) approach using Rubinstein’s alternating offers model and a dynamic approach in which we find that even under weak assumptions, outcomes and reference points converge to the steady state solution from any non-equilibrium state.

Keywords: loss aversion; bargaining; reference dependence (search for similar items in EconPapers)
JEL-codes: C78 (search for similar items in EconPapers)
Date: 1997-01-01
References: Add references at CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Loss Aversion and Bargaining (2002)
Working Paper: Loss Aversion and Bargaining (1997)
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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvco:1997006

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