Bargaining with a residual claimant: an experimental study

Embrey, Matthew, Hyndman, Kyle and Riedl, Arno (2021) Bargaining with a residual claimant: an experimental study. Games and Economic Behavior, 126. pp. 335-354. ISSN 0899-8256

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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.

Item Type: Article
Keywords: Bargaining, Ex-post Risk, Reference Points
Schools and Departments: University of Sussex Business School > Economics
SWORD Depositor: Mx Elements Account
Depositing User: Mx Elements Account
Date Deposited: 19 Jan 2021 11:39
Last Modified: 27 Jan 2021 08:30
URI: http://sro.sussex.ac.uk/id/eprint/96569

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