Abstract
Demands and concessions in a multi-stage bargaining process are shaped by the probabilities that each side will prevail in an impasse. Standard game-theoretic predictions are quite sharp: demands are pushed to the precipice with nothing left on the table, but there is no conflict regardless of the degree of power asymmetry. Indeed, there is no delay in reaching an agreement that incorporates the (unrealized) costs of delay and conflict. A laboratory experiment has been used to investigate the effects of power asymmetries on conflict rates in a two-stage bargaining game that is (if necessary) followed by conflict with a random outcome. Observed demands at each stage are significantly correlated with power, as measured by the probability of winning in the event of disagreement. Demand patterns, however, are flatter than theoretical predictions, and conflict occurs in a significant proportion of the interactions, regardless of the degree of the power asymmetry. To address these deviations from the standard game-theoretic predictions, we also estimated a logit quantal response model, which generated the qualitative patterns that are observed in the data. This one-parameter generalization of the Nash equilibrium permits a deconstruction of the strategic incentives that cause demands to be less responsive to power asymmetries than Nash predictions.
Highlights
When John von Neumann and Oscar Morgenstern began working on Theory of Games and Economic Behavior almost a century ago, they were motivated by the observation that most received theory pertained to price-based interactions in large markets, whereas a large fraction of economic activity involves bargaining in small group settings
This paper examines how the probability of winning in a conflict shapes the demands and counter-demands that are made in initial stages of the bargaining process
The experimental setup is novel in that it allows us to examine an important issue in the literature of international relations, i.e., how conflict rates are affected by power asymmetries that would come into play in the event of an impasse
Summary
When John von Neumann and Oscar Morgenstern began working on Theory of Games and Economic Behavior almost a century ago, they were motivated by the observation that most received theory pertained to price-based interactions in large markets, whereas a large fraction of economic activity involves bargaining in small group settings. Bargaining models have been adapted to explain the durability of peace agreements, extended deterrence, and the relation between trade and conflict This paradigm extends to other issues of importance to social scientists, e.g., the incidence of costly strikes that follow breakdowns in labor negotiations, or costly delays in the adjudication of tort claims. The standard Stahl-Rubinstein model of alternating-offer bargaining has an infinite horizon, with no conflict, but effects of discounting and delay are sufficient to induce an immediate agreement that is shaped by the potential costs of delay Finite versions of this model that are convenient for laboratory experiments typically impose exogenous payoffs in the final stage.. Conflict risk can be implemented by having the outcome of an impasse be determined by a random lottery The predictions of this conflict bargaining model with a lottery depend on relative power, as measured by the probabilities that each side would prevail. Some behavioral explanations of the observed deviations from game-theoretic predictions are analyzed
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