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Reference points in sequential bargaining: theory and experiment

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  • Kjell Arne Brekke
  • Alice Ciccone
  • Tom‐Reiel Heggedal
  • Leif Helland

Abstract

We introduce loss aversion in an infinite‐horizon, alternating‐offers model. When outside options serve as reference points, the equilibrium of our model follows that of the standard Rubinstein bargaining model (i.e., outside options do not affect the equilibrium unless they are binding). However, when reference points are given by the resources that players contribute to the pie, the bargaining outcome changes such that a player's share increases in her contribution. We test our model's predictions in the laboratory. As predicted, only binding outside options affect the division of the pie. Data also show that contributions matter for bargaining outcomes when they are activated as reference points, but not quite as predicted by our theory. Proposers gain a higher share of the pie only when they have contributed a higher share than the opponent has.

Suggested Citation

  • Kjell Arne Brekke & Alice Ciccone & Tom‐Reiel Heggedal & Leif Helland, 2024. "Reference points in sequential bargaining: theory and experiment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 126(2), pages 254-288, April.
  • Handle: RePEc:bla:scandj:v:126:y:2024:i:2:p:254-288
    DOI: 10.1111/sjoe.12552
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    References listed on IDEAS

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