Working Paper: NBER ID: w29111
Authors: Daniel Keniston; Bradley J. Larsen; Shengwu Li; JJ 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.
Keywords: bargaining; fairness; split-the-difference; incomplete information
JEL Codes: C7; C78
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| agents' perception of fairness based on the proximity of offers (C78) | agents favor offers that split the difference between the two most recent offers (C78) |
| offers that split the difference between the two most recent offers (C78) | viewed as fair (D63) |
| agents' previous offer rejections (L85) | agents' perception of fairness based on the proximity of offers (C78) |
| agents' perception of fairness based on the proximity of offers (C78) | behavior compatible with perfect Bayesian equilibrium (PBE) (C73) |