Abstract
AbstractWe consider how the outcome of bargaining varies with changes in the trade-off between equality, efficiency, and total-earnings maximization. We observe that subjects avoid an equal-earning outcome if it is Pareto inefficient; a large proportion of bargaining pairs avoids an equal and Pareto efficient outcome in favor of one giving unequal and total-earnings maximizing payoffs, and this proportion increases when unequal outcomes imply larger earnings to one of the players, even though this also implies higher inequality; finally, we document a compromise effect that violates the independence of irrelevant alternatives condition.
Highlights
The welfare properties of equity and efficiency may determine the focal equilibrium in any game, whether there is an arbitrator or not. (Myerson, 1991, p. 373, italics in original)Bargaining is ubiquitous in economic and social life
Will it be one that equates earnings? Will it be efficient, or maximize total earnings? In this paper we present the findings from an empirical investigation related to Myerson’s conjecture quoted above, that a focal agreement possesses some combination of desirable welfare properties such as efficiency and equity
For each of these six categories, we investigate in which games it is observed, and what it accomplishes in terms of bargaining outcome
Summary
The welfare properties of equity and efficiency may determine the focal equilibrium in any game, whether there is an arbitrator or not. (Myerson, 1991, p. 373, italics in original)Bargaining is ubiquitous in economic and social life. The welfare properties of equity and efficiency may determine the focal equilibrium in any game, whether there is an arbitrator or not. Creditors negotiate over the division of the assets of a bankrupt company. It is important for economists and other social scientists to predict which agreement, if any, the bargainers will reach. In this paper we present the findings from an empirical investigation related to Myerson’s conjecture quoted above, that a focal agreement possesses some combination of desirable welfare properties such as efficiency and equity. We consider three potentially salient welfare properties: equality, Pareto efficiency, and total-earnings maximization. We refer to the latter as ‘total-earnings efficiency’ and to Pareto efficiency as ‘efficiency’.1
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