Working Paper: CEPR ID: DP15698
Authors: Heiko Karle; Andrea Canidio
Abstract: Two players with preferences distorted by the focusing effect (Koszegi and Szeidl, 2013) negotiate an agreement over several issues and one transfer. Our main result is that, as long as their preferences are differentially distorted, an issue will be inefficiently left out of the agreement or inefficiently included in the agreement whenever the importance of the other issues on the table is sufficiently large. When this is the case,the salience of the transfer dimension is large for both players, but differentially so, therefore creating a form of disagreement between them. In extreme cases, this could lead to an inefficient breakdown of the negotiation. Anticipating this possibility, the negotiating parties may negotiate in stages, by first signing an incomplete agreement and later finalizing the outcome of the negotiation. As in Raiffa (1982), theseincomplete agreements may impose bounds on some dimensions of the bargaining solution in order to reduce their salience.
Keywords: salience; focusing effect; bargaining; negotiations; incomplete agreements
JEL Codes: C78; D03; D86; F51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| focusing effect (D91) | inefficient outcomes in negotiations (C78) |
| differentially distorted preferences (D11) | inefficient outcomes in negotiations (C78) |
| relative importance of issues (D72) | inefficient inclusion/exclusion of issues (D72) |
| importance of other issues (P46) | salience of transfer dimension (F16) |
| salience of transfer dimension (F16) | disagreement and negotiation breakdown (D74) |
| negotiating in stages (C78) | mitigate inefficiencies (D61) |
| elimination of issues (L15) | enhance negotiation efficiency (C78) |