Working Paper: CEPR ID: DP5822
Authors: Lucy White
Abstract: We investigate the outcome of bargaining when a player?s pay-off from agreement is risky. We find that a risk-averse player typically increases his equilibrium receipts when his pay-off is made risky. This is because the presence of risk makes individuals behave 'more patiently' in bargaining. Strong analogies are drawn to the precautionary saving literature. We show that the effect of risk on receipts can be sufficiently strong that a decreasingly risk-averse player may be better off receiving a risky pay-off than a certain pay-off.
Keywords: Nash bargaining; prudence; risk aversion; Rubinstein bargaining
JEL Codes: C71; C72; C78; D80
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| risk (D81) | bargaining outcomes (C78) |
| risk (payoff made risky) (D81) | equilibrium receipts of risk-averse player (D81) |
| presence of risk (D81) | behavior of individuals in bargaining (C79) |
| increase in expected marginal utility of extra income due to risk (D11) | greater willingness to hold out for higher payoffs in negotiations (C78) |
| risk (D81) | expected receipts from bargaining (J52) |
| risk premium exceeds the slope of the indifference curve (D11) | expected receipts from bargaining (J52) |