Bargaining Theory and Experiments
Saturday, Jan. 6, 2018 2:30 PM - 4:30 PM
- Chair: Jack Fanning, Brown University
Information Transmission Through Bargaining: Experimental Evidence
AbstractWe design an experiment to examine the information transmission properties of bargaining in markets impaired by adverse selection. In line with theory, frictions are essential to generate trade of high quality goods and that competition among uninformed parties further amplifies this positive effect. In contrast, we find no evidence for the prediction that transparency hinders information transmission. Unlike at equilibrium, the observability of offers increases competitive behavior of buyers and reinforces the seller's monopoly power. The effect is most pronounced for risk-averse buyers, who bid aggressively in a fashion reminiscent of effects witnessed in first-price auctions.
Multilateral Bargaining in the Shadow of Uncertainty
AbstractWe study a multilateral bargaining environment with unknown size of the future budget, in which players cannot write contingent contracts regarding future events. This setup captures trade-offs present in various financial decisions such as bankruptcy negotiations or mergers and acquisitions. Theoretical analyses by Eraslan and Merlo (2002) show that the voting rule used by the committee plays an important role in shaping bargaining outcomes. We investigate these trade-offs experimentally by varying both the uncertainty regarding future budgets and the voting rule. Our results highlight the advantage of using a unanimity voting rule to promote efficient allocations.
A Theory and Experiment of How Competitive Bargaining Can Lead to Efficient Coordination
AbstractSynergies in production are ubiquitous in shared production processes such as those involving individuals within a team, departments within a firm, or industries within a country. Using a weakest-link game with ex post bargaining to redistribute the joint surplus we study a situation in which no central manager (or principal) can induce coordination, but instead team members decide how to compensate each other. We show that standard bargaining theory predictions (stationary equilibria) do not provide a rationale for selecting efficient outcomes among the multiple Pareto-ranked equilibria. Nevertheless, we identify history-dependent bargaining strategies based on members' contributions which refine the set of equilibria selecting only the most and least efficient outcomes. An experiment shows that ex post bargaining leads to enhanced efficiency compared to the benchmark weakest link game. When efforts are not publicly known (due to monitoring costs for example) average effort levels fall close to those observed in the control without bargaining. Our results provide a rationale for the role of democracy in attaining efficient economic outcomes and explain why firms and partnerships might implement ex post profit-sharing or other participatory compensation mechanisms within them.
- C7 - Game Theory and Bargaining Theory