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EHR-paper-2020-12-03.pdf (2.4 MB)

Bargaining with a residual claimant: an experimental study

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posted on 2023-06-09, 22:48 authored by Matthew EmbreyMatthew Embrey, Kyle Hyndman, Arno Riedl
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.

History

Publication status

  • Published

File Version

  • Accepted version

Journal

Games and Economic Behavior

ISSN

0899-8256

Publisher

Elsevier

Volume

126

Page range

335-354

Department affiliated with

  • Economics Publications

Full text available

  • Yes

Peer reviewed?

  • Yes

Legacy Posted Date

2021-01-19

First Open Access (FOA) Date

2022-07-20

First Compliant Deposit (FCD) Date

2021-01-18

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