Research Summary
Research Summary
Prudence in Bargaining
Description
We investigate the outcome of Rubinstein’s (1982) alternating-offer bargaining game when noise is added to a player’s pay-off. 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, analogously 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.
JEL Classification: C71, C72, C78, C90, D23, D80
Keywords: Nash Bargaining, Rubinstein Bargaining, Uncertainty, Prudence.
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