Inequality aversion causes equal or unequal division in alternating-offer bargaining

Stefan Kohler

MPRA Paper from University Library of Munich, Germany

Abstract: This note presents a solution to Rubinstein (1982)'s open-ended, alternating-offer bargaining problem for two equally patient bargainers that exhibit similar degrees of inequality aversion. Inequality-averse bargainers may perceive envy if being worse off and guilt if being better off, but they still reach agreement in the first period under complete information. If the perceived guilt is strong, then the inequality-averse bargainers split the bargaining surplus equally regardless of their degree of envy. If guilt is weak, then the agreed split is tilted away from the Rubinstein division towards a more unequal split. Envy and weak guilt have opposite effects on the bargaining outcome, and envy has a greater marginal impact than weak guilt. Similarly inequality-averse bargainers agree on the Rubinstein division if the strength of envy equals the discounted strength of guilt. As both bargainers sensation of inequality aversion diminishes, the bargaining outcome converges to the Rubinstein division.

Keywords: alternating offers; bargaining; bargaining power; behavioral economics; envy; equity; fairness; guilt; negotiation; social preferences (search for similar items in EconPapers)
JEL-codes: C78 D3 D63 (search for similar items in EconPapers)
Date: 2013-07-06
New Economics Papers: this item is included in nep-evo, nep-exp, nep-gth and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: INEQUALITY AVERSION CAUSES EQUAL OR UNEQUAL DIVISION IN ALTERNATING‐OFFER BARGAINING (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:40764

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