Multilateral bargaining with proposer selection contest

Abstract

AbstractThis study investigates the competition to be selected as the proposer in a subsequent multilateral bargaining game experimentally. The experimental environment varies in two dimensions: reservation payoffs (homogeneous or heterogeneous) and information on the extent of each subject's investment in the competition (public or private). The proposer's share was significantly lower than what theory predicts, and with taking into account the proposer's partial rent extraction, subjects over‐invest to increase their chances of winning the right to propose. More importantly, we find that inefficiency (due to the costly competition) and inequity go hand in hand; the surplus was distributed most efficiently and most equally when subjects were informed of who had spent how much in the competition, and slightly more when the reservation payoffs were heterogeneous. The proportion of proposals being rejected was smaller in the public treatments than in the private treatments. This study contributes to the literature by identifying formal rules that are more effective in establishing efficient informal norms.