The Effect of Sunk Costs on the Outcome of Alternating-Offers Bargaining between Inequity-Averse Agents

Christian Ewerhart

No 203, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: The paper analyzes the infinite-horizon alternating-offers bargaining game between agents with inequity-averse preferences. Without prior investments, the model predicts a shift of the outcome towards equal division. Asymmetric investments affect the ex-post bargaining outcome, giving an advantage to the party that contributed more. Under suitable circumstances, this effect may significantly mitigate the hold-up problem. In fact, in a symmetric setup, if production is sufficiently profitable, and parties are sufficiently patient, then the first-best investment levels can be approximated without a contract.

Keywords: Alternating-offers bargaining; inequity aversion; hold-up problem (search for similar items in EconPapers)
JEL-codes: C72 C91 (search for similar items in EconPapers)
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Citations: View citations in EconPapers (13)

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Related works:
Journal Article: The Effect of Sunk Costs on the Outcome of Alternating-Offers Bargaining Between Inequity-Averse Agents (2006)
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