How fully do people exploit their bargaining position? The effects of bargaining institution and the 50-50 norm

Nejat Anbarci and Nick Feltovich

A recurring puzzle in bargaining experiments is that individuals under-respond to changes in their bargaining position, compared to the predictions of standard bargaining theories. This result has been observed in a variety of settings, but there has been little systematic study of the factors associated with higher or lower responsiveness. We conduct a complete-information bargaining experiment using two institutions - the Nash demand game (NDG) and a related unstructured bargaining game (UBG) - and with bargaining power varied via the disagreement outcome. Importantly, in about one-fourth of bargaining pairs, one player's disagreement payoff is more than half the cake size; in these cases, 50-50 splits are not individually rational.

We find that subjects are least responsive to changes in bargaining position in the NDG with both disagreement payments below half the cake size. Responsiveness is higher in the UBG, and in the NDG when one disagreement payment is more than half the cake, but in both cases it is still less than predicted. It is only in the UBG with a disagreement payment more than half the cake that responsiveness reaches the predicted level. Our results imply that the extent to which actual bargaining corresponds to theoretical predictions will depend on (1) the institutions within which bargaining takes place, and (2) the distribution of bargaining power, in particular, whether the 50-50 norm yields a plausible focal point. We construct and analyse a simple model that characterises our main results.

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