Does Overconfidence Lead to Bargaining Failures?

We use a laboratory experiment to study the causal impact of self-confidence on bargaining with joint production. We exogenously manipulate the self-confidence of subjects regarding their relative performance by employing easy and hard tasks. Subjects are randomly matched into pairs and each pair bargains over a joint surplus which can be either high or low. The size of the joint surplus depends on the pair’s relative performance on the task. Our main experimental findings are as follows. First, the percentage of bargaining failures when subjects perform the easy task is more than triple than when they perform the hard task. Second, there is a remarkably high percentage of bargaining failures when subjects perform the easy task and bargain over a low surplus. Third, when subjects perform the easy task and bargain over a high surplus, all pairs reach an agreement and most settle on the equal split. Our findings shed light on the conditions and mechanisms under which overconfidence causes bargaining failures.