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That's my final offer! Bargaining behavior with costly delay and credible commitment

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  • Swope, Kurtis J.
  • Cadigan, John
  • Schmitt, Pamela

Abstract

We examine laboratory bargaining experiments with symmetric and asymmetric delay costs and options for proposers to credibly commit to a bargaining position. Contrary to standard game-theoretic predictions, our experimental results suggest that commitment can be used effectively to increase the committer's payoff, particularly in a one-to-many bargaining environment where strategic holdout behavior is likely. However, we find evidence that commitment may also increase the number of failed agreements and reduce overall efficiency from exchange. To explain why behavior is inconsistent with standard game-theoretic predictions, we offer a behavioral bargaining model that allows for both “sincere” and “strategic” responders. Strategic responders behave as expected-payoff maximizers, while sincere responders behave according to a minimum-acceptable-offer (MAO) rule. We demonstrate that a mix of sincere and strategic types in the population is necessary to generate increasing equilibrium offers over time and “holdout” behavior, whereby strategic responders wait for higher offers in later periods. In response, proposers may find it optimal to commit early to an offer if commitment is possible.

Suggested Citation

  • Swope, Kurtis J. & Cadigan, John & Schmitt, Pamela, 2014. "That's my final offer! Bargaining behavior with costly delay and credible commitment," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 49(C), pages 44-53.
    • Handle: RePEc:eee:soceco:v:49:y:2014:i:c:p:44-53
    DOI: 10.1016/j.socec.2014.02.005
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    References listed on IDEAS

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    3. Winn, Abel & McCarter, Matthew & DeSantis, Mark, 2018. "Land Assembly without Eminent Domain: Laboratory Experiments of Two Tax Mechanisms," Working Papers 07001, George Mason University, Mercatus Center.
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    7. Joo, M. Hashemi & Parhizgari, A.M., 2021. "A behavioral explanation of credit ratings and leverage adjustments," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).

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