Fairness, Escalation, Deference, and Spite: Strategies Used in Labor-Management Bargaining Experiments with Outside Options

Abstract

Labor-management negotiations are an example of a situation in which outside options may play an important role in determining outcomes. In particular, firms may attempt to use outside options to extract concessions from unions. In reviewing two recent cases of bargaining between management and a union, we notice that although the situations appear similar, the negotiated outcomes are dramatically different. We hypothesize that behavioral factors may play a role. To test this conjecture, we construct a bargaining experiment. Our results suggest that outside options do affect bargaining behavior. First, we find that many fair offers are rejected and, in general, the rate of conflict is high. Second, firms who search for outside options, but do not take them, return to bargaining and make higher offers than if they had not searched. Third, overall the act of searching by firms tends to trigger concessions from unions except when the union has previously been hung out to dry by a firm accepting an outside option. In this case unions react spitefully.