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Bargaining with a Residual Claimant: An Experimental Study

Matthew Embrey, Kyle Hyndman () and Arno Riedl
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Kyle Hyndman: Naveen Jindal School of Management, University of Texas at Dallas, USA

Working Paper Series from Department of Economics, University of Sussex Business School

Abstract: Most negotiations involve risks that are only resolved ex-post and often these risks are not incurred equally by the parties involved. We experimentally investigate bargaining situations where a residual claimant is exposed to ex-post risk, whereas a fixedpayoff player is not. We find that residual claimants extract a risk premium, which increases in risk exposure and that this premium is sometimes high enough to make it beneficial to bargain over a risky rather than a risk-less pie. In contrast to predictions of a benchmark model, it is the comparatively less risk averse residual claimants who benefit the most and this is driven by fixed-payoff player's adoption of weak bargaining strategies when the pie is risky. It is also the less risk averse who, when given the choice, choose to bargain over a riskier distribution. We also show that as risk increases, conflict about what constitutes a fair compensation for risk exposure is enhanced, which increases bargaining frictions.

Keywords: Bargaining; Ex-post Risk; Reference Points (search for similar items in EconPapers)
JEL-codes: C71 C92 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-gth
Date: 2019-02
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Related works:
Working Paper: Bargaining with a Residual Claimant: An Experimental Study (2014) Downloads
Working Paper: Bargaining with a residual claimant: An experimental study (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:sus:susewp:0419

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