Loss Aversion and Bargaining

Jonathan Shalev ()

Game Theory and Information from University Library of Munich, Germany

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)
Pages: 30 pages
Date: 1996-06-05, Revised 1997-07-19
Note: 30 pages, LaTeX. New version from 7/97.
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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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