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Fairness in Incomplete Information Bargaining: Theory and Widespread Evidence from the Field

Author

Listed:
  • Daniel Keniston
  • Bradley J. Larsen
  • Shengwu Li
  • J.J. Prescott
  • Bernardo S. Silveira
  • Chuan Yu

Abstract

This paper uses detailed data on sequential offers from seven vastly different real-world bargaining settings to document a robust pattern: agents favor offers that split the difference between the two most recent offers on the table. Our settings include negotiations for used cars, insurance injury claims, a TV game show, auto rickshaw rides, housing, international trade tariffs, and online retail. We demonstrate that this pattern can arise in a perfect Bayesian equilibrium of an alternating-offer game with two-sided incomplete information, but this equilibrium is far from unique. We then provide a robust-inference argument to explain why agents may view the two most recent offers as corresponding to the potential surplus. Split-the-difference offers under this weaker, robust inference can then be viewed as fair. We present a number of other patterns in each data setting that point to split-the-difference offers as a strong social norm, whether in high-stakes or low-stakes negotiations.

Suggested Citation

  • Daniel Keniston & Bradley J. Larsen & Shengwu Li & J.J. Prescott & Bernardo S. Silveira & Chuan Yu, 2021. "Fairness in Incomplete Information Bargaining: Theory and Widespread Evidence from the Field," NBER Working Papers 29111, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29111
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    Citations

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    Cited by:

    1. Ignacio Palacios-Huerta & David C. Parkes & Richard Steinberg, 2024. "Combinatorial Auctions in Practice," Journal of Economic Literature, American Economic Association, vol. 62(2), pages 517-553, June.
    2. Tom-Reiel Heggedal & Thomas McKay, 2024. "Discounting in finite-time bargaining experiments," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 10(2), pages 504-518, December.
    3. Alecos Papadopoulos, 2024. "The Nash Bargaining Two-tier Stochastic Frontier Model," Advances in Econometrics, in: Essays in Honor of Subal Kumbhakar, volume 46, pages 439-476, Emerald Group Publishing Limited.
    4. Jennie Huang & Judd B. Kessler & Muriel Niederle, 2024. "Fairness has less impact when agents are less informed," Experimental Economics, Springer;Economic Science Association, vol. 27(1), pages 155-174, March.
    5. Petrowsky, Hannes M. & Schweinsberg, Martin & Seitz, Lennart & Funk, Burkhardt & Loschelder, David D., 2023. "Deal or no deal? How round vs precise percentage offers and price-ending mimicry affect impasse risk in over 25 million eBay negotiations," Journal of Economic Psychology, Elsevier, vol. 94(C).
    6. Dindaroglu, Burak & Ertac, Seda, 2024. "An empirical study of sequential offer bargaining during the Festival of Sacrifice," Journal of Economic Psychology, Elsevier, vol. 101(C).
    7. Preyas Desai & Pranav Jindal, 2024. "Getting a Break in Bargaining: An Upside of Time Delays," Marketing Science, INFORMS, vol. 43(6), pages 1260-1278, November.

    More about this item

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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