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Dissolving partnerships under risk: An experimental investigation

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  • Hyndman, Kyle

Abstract

We experimentally study a situation in which two players negotiate the dissolution of a risky partnership. In our experiments, subjects must simultaneously negotiate both a selling price and the identity of the buyer. Upon reaching an agreement, one party (the buyer) will be subject to ex post risk, while the other party (the seller) will not, and the negotiation determines which party will hold the risk. Our results show that buyers extract a premium which is increasing in the riskiness of the partnership value distribution. Moreover, during bargaining, the majority of subjects make offers in which they would be the buyer (and thus exposed to risk) if the offer is accepted. Allowing subjects to communicate has noticeable effects: agreements are significantly more frequent and sorting according to fairness ideas – such that the buyer is the player with the higher “fair price” – is more frequent. We also show that, when subjects are able to communicate, bargaining pairs who discuss risk exposure or fairness generally agree to a lower price, giving greater compensation to risk for the buyer.

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  • Hyndman, Kyle, 2021. "Dissolving partnerships under risk: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 185(C), pages 702-720.
    • Handle: RePEc:eee:jeborg:v:185:y:2021:i:c:p:702-720
    DOI: 10.1016/j.jebo.2021.03.020
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    Cited by:

    1. Oechssler, Jörg & Roomets, Alex, 2023. "Dissolving an ambiguous partnership," Working Papers 0733, University of Heidelberg, Department of Economics.
    2. Hyndman, Kyle, 2023. "Dynamic fairness in repeated bargaining with risk," Journal of Economic Psychology, Elsevier, vol. 94(C).

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    More about this item

    Keywords

    Bargaining; Ex-post risk; Partnership dissolution;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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