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The Effect of Sunk Costs on the Outcome of Alternating-Offers Bargaining between Inequity-Averse Agents

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  • Christian Ewerhart

Abstract

The paper analyzes the infinite-horizon alternating-offers bargaining game between agents with inequity-averse preferences. Without prior investments, the model predicts a shift of the outcome towards equal division. Asymmetric investments affect the ex-post bargaining outcome, giving an advantage to the party that contributed more. Under suitable circumstances, this effect may significantly mitigate the hold-up problem. In fact, in a symmetric setup, if production is sufficiently profitable, and parties are sufficiently patient, then the first-best investment levels can be approximated without a contract.

Suggested Citation

  • Christian Ewerhart, "undated". "The Effect of Sunk Costs on the Outcome of Alternating-Offers Bargaining between Inequity-Averse Agents," IEW - Working Papers 203, Institute for Empirical Research in Economics - University of Zurich.
    • Handle: RePEc:zur:iewwpx:203
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    References listed on IDEAS

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    Cited by:

    1. Rasch, Alexander & Wambach, Achim & Wiener, Kristina, 2012. "Bargaining and inequity aversion: On the efficiency of the double auction," Economics Letters, Elsevier, vol. 114(2), pages 178-181.
    2. von Siemens, Ferdinand A., 2009. "Bargaining under incomplete information, fairness, and the hold-up problem," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 486-494, August.
    3. Christian Korth, 2009. "Fairness, Price Stickiness, and History Dependence in Decentralized Trade," Lecture Notes in Economics and Mathematical Systems, in: Fairness in Bargaining and Markets, chapter 0, pages 81-101, Springer.
    4. Hoppe, Eva I. & Schmitz, Patrick W., 2011. "Can contracts solve the hold-up problem? Experimental evidence," Games and Economic Behavior, Elsevier, vol. 73(1), pages 186-199, September.
    5. Fehr, Ernst & Fischbacher, Urs & Kosfeld, Michael, 2005. "Neuroeconomic Foundations of Trust and Social Preferences," IZA Discussion Papers 1641, Institute of Labor Economics (IZA).
    6. Tania Singer & Ernst Fehr, 2005. "The Neuroeconomics of Mind Reading and Empathy," American Economic Review, American Economic Association, vol. 95(2), pages 340-345, May.
    7. Bruno S. Frey & Simon Luechinger & Alois Stutzer, 2007. "Calculating Tragedy: Assessing The Costs Of Terrorism," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 1-24, February.
    8. Siemens, Ferdinand von, 2005. "Bargaining under Incomplete Information, Fairness, and the Hold-Up Problem," Discussion Papers in Economics 518, University of Munich, Department of Economics.
    9. Armin Falk & Ernst Fehr & Christian Zehnder, "undated". "The Behavioral Effects of Minimum Wages," IEW - Working Papers 247, Institute for Empirical Research in Economics - University of Zurich.
    10. Siemens, Ferdinand von, 2005. "Bargaining under Incomplete Information, Fairness, and the Hold-Up Problem," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 57, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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    More about this item

    Keywords

    Alternating-offers bargaining; inequity aversion; hold-up problem;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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