Incomplete Information about Social Preferences Explains Equal Division and Delay in Bargaining

Abstract

Two deviations of alternating-offer bargaining behavior from economic theory are observed together, yet have been studied separately. Players who could secure themselves a large surplus share if bargainers were purely self-interested incompletely exploit their advantage. Delay in agreement occurs even if all experimentally controlled information is common knowledge. This paper rationalizes both regularities coherently by modeling heterogeneous social preferences, either self-interest or envy, of one bargaining party as private information in a three period game of bargaining and preference screening and signaling

Inequality Aversion Causes Equal or Unequal Division in Alternating‐offer Bargaining

“…So does the study at hand, which considers similar bargainers who can experience envy and guilt in the Rubinstein bargaining problem. Our analysis of bargaining between inequality averse parties who have complete information generalizes the earlier analyses of bargaining among parties who may perceive either envy or guilt (Kohler, , ), and it complements Kohler () and Mauleon and Vannetelbosch () who studied relative concerns and delay in alternating‐offer bargaining with private information in finite and infinite horizon alternating‐offer bargaining models, respectively. Mauleon and Vannetelbosch, who focused on Rubinstein bargaining under incomplete information, also studied a case of complete information, in which both players have relative concerns captured by a special case of Fehr and Schmidt's model of inequality aversion.…”

“…Alternating‐offer bargaining between envious bargainers with player‐specific preferences has been studied previously in an infinite horizon game with complete information and in a finite horizon game with incomplete information (Kohler, , ). Infinite horizon alternating–offer bargaining between similar, merely guilt‐experiencing bargainers has been studied by Kohler ().…”

Envy can promote more equal division in alternating-offer bargaining.

“…Finally, another group of studies differ from this one by investigating regard for others in bargaining models that depart from Rubinstein's original framework. Relaxing the assumption of complete information, Kohler (2012b) analyzes uncertainty about the strength of the second bargainer's envy in a finite alternating-offer bargaining problem. Similar to the influence of envy in infinite-horizon bargaining, the agreed contract can contain an equal division with or without delay, which results from the need to incur costs in order to credibly signal a psychological element in the preferences.…”

Hierarchical Bayesian Analysis of Biased Beliefs and Distributional Other-Regarding Preferences

“…For the variances of error terms, τ • , in (5) and (4) we assigned Gamma(10,10) priors. 4 As above after 30.000 burn-in draws from two MCMC chains and recording every 10th draw in each chain, a final posterior distribution with 56.000 draws is obtained using OpenBugs. As explained above, convergence is ascertained by visual inspection of the history of the draws from the two chains as well as using the [40] R statistics.…”

“…(For example, according to our most recent search of Google Scholar on November 21, 2012, Fehr and Schmidt's [3] inequality aversion model is cited 5299 times, approaching the 7454 citations of Adam Smith's "The Theory of Moral Sentiments"). It is also acknowledged that there is heterogeneity in preferences, i.e., some actors are selfish, whereas some actors have other-regarding preferences to varying degrees (e.g., [3,4]). This heterogeneity is often invoked as an important factor to explain why, under some experimental conditions, results seem to converge to the classical economic model's predictions, while under other conditions, results deviate significantly from the classical model.…”