Dynamic fairness in repeated bargaining with risk

Abstract

We study dynamic notions of fairness via an experiment of a two-round bilateral bargaining environment, where the payoff to one player is subject to ex-post risk, while the other player receives a fixed payment, effectively making the player exposed to risk a residual claimant. The ex-post risk not only provides substantive issues for bargaining parties to resolve in the experiment – i.e. what is a fair compensation for the exposure to risk – it also results in the endogenous formation of reference points for the second round due to ex post inequality after the realization of uncertainty in the first round. We find support for a “payback” hypothesis. That is, agreements in the second round significantly differ from the first round in a manner consistent with reducing the inequality that arose due to the initial pie realization.