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CeDEx 2015-18: Efficiency versus Equality in Bargaining

Efficiency versus Equality in Bargaining

Summary

Bargaining is ubiquitous in economic and social life. It is important for economists and other social scientists to predict which agreement, if any, the bargainers will reach. Will it be one that equates earnings? Will it be maximize total earnings? The authors focus on bargaining situations where equality and total-earnings maximization cannot both be achieved. Examples are the division of a deceased person’s estate among the heirs and the dissolution of a partnership. In both cases there are indivisible assets, and the bargainers may be liquidity constrained, so that the bargainer that gets the better assets may not be able to fully compensate the other bargainer. Equal earnings can be achieved by selling the assets and dividing the proceeds equally, but, depending on how marketable the assets are, the proceeds from the sale may be quite low.

In this Nottingham School of Economics working paper, Maria Montero and co-authors investigate this question in a laboratory experiment where pairs of subjects negotiate over a given set of feasible contracts. The set consists of an equal contract and either one or two unequal contracts; the unequal contracts offer higher payoffs for one or both of the subjects. Subjects can make binding proposals by clicking on contracts, and they can also communicate via chat in real time. A large proportion of bargaining pairs avoid equal contracts in favour of unequal and total-earnings maximizing contracts, and this proportion increases when unequal contracts offer larger earnings to one of the subjects, even though this implies higher inequality. Subjects are more likely to settle on the equal contract if this contract is a compromise between two unequal contracts rather than when there is only one unequal contract available. This ‘compromise effect’ suggests that the attraction of the equal contract is not just due to its absolute property of offering equal earnings, but is enhanced when it occupies a central position within the set of available contracts.

CeDEx Discussion Paper 2015/18, Efficiency versus Equality in Bargaining by Fabio Galeotti, Maria Montero and Anders Poulsen

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Authors

Fabio Galeotti, Maria Montero and Anders Poulsen

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Posted on Tuesday 10th November 2015

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