The Effect of Decision Weights in Bargaining Problems

H.J.M. Peters, V. Köbberling

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12 Citations (Scopus)

Abstract

Bargaining problems are considered where the preferences of the bargainers deviate from expected utility but can be modelled according to rank-dependent utility theory. Under rank-dependent utility both the utility function and the probability weighting function influence the risk attitude of a decision maker. The same definition of risk aversion leads to two forms of risk aversion: utility risk aversion and probabilistic risk aversion. The main finding is that these two forms can have surprisingly opposite consequences for bargaining solutions that exhibit a weak monotonicity property. In particular, in a large class of bargaining problems both increased utility risk aversion and decreased probabilistic risk aversion of the opponent are advantagous for a player. This is demonstrated for the kalai–smorodinsky bargaining solution. The nash bargaining solution does not behave regularly in this respect.
Original languageEnglish
Pages (from-to)154-175
JournalJournal of Economic Theory
Volume110
DOIs
Publication statusPublished - 1 Jan 2003

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