Bargaining with a residual claimant: An experimental study

Matthew Embrey, Kyle Hyndman*, Arno Riedl

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

Many negotiations involve risks that are resolved ex-post. Often these risks are not incurred equally by the parties involved. We experimentally investigate bargaining situations where a residual claimant faces ex-post risk, whereas a fixed-payoff player does not. Consistent with a benchmark model, we find that residual claimants extract a risk premium, which increases in risk exposure. This premium can be high enough to make it beneficial to bargain over a risky rather than a risk-less pie. Contrary to the model's predictions, we find that the comparatively less risk averse residual claimants benefit the most from risk exposure. This is because fixed-payoff players' adopt weak bargaining strategies when the pie is risky. We find evidence for a behavioural mechanism where asymmetric exposure to risk between the two parties creates a wedge between their fairness ideas, which shifts agreements in favour of residual claimants but also increases bargaining friction.
Original languageEnglish
Pages (from-to)335-354
Number of pages20
JournalGames and Economic Behavior
Volume126
DOIs
Publication statusPublished - Mar 2021

JEL classifications

  • c71 - Cooperative Games
  • c92 - Design of Experiments: Laboratory, Group Behavior
  • d81 - Criteria for Decision-Making under Risk and Uncertainty

Keywords

  • Bargaining
  • Ex-post risk
  • Reference points
  • STAKES RISK-AVERSION
  • FAIRNESS
  • CALIBRATION
  • PREFERENCES
  • UNCERTAINTY
  • GAMES

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