Alternating offers bargaining with loss aversion

Driesen, B., Perea, A. and Peters, H. (2012) Alternating offers bargaining with loss aversion. Mathematical Social Sciences, 64(2), pp. 103-118. (doi: 10.1016/j.mathsocsci.2011.10.010)

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Abstract

The Rubinstein alternating offers bargaining game is reconsidered under the assumption that each player is loss averse and the associated reference point is equal to the highest turned down offer of the opponent in the past. This makes the payoffs and therefore potential equilibrium strategies dependent on the history of play. A subgame perfect equilibrium is constructed, in which the strategies depend on the history of play through the current reference points. It is shown that this equilibrium is unique under some assumptions that it shares with the equilibrium in the classical model: immediate acceptance of equilibrium offers, indifference between acceptance and rejection of such offers, and strategies depending only on the current reference points. It is also shown that in this equilibrium loss aversion is a disadvantage. Moreover, a relation with asymmetric Nash bargaining is established, where a player’s bargaining power is negatively related to own loss aversion and positively to the opponent’s loss aversion.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Driesen, Dr Bram
Authors: Driesen, B., Perea, A., and Peters, H.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Mathematical Social Sciences
Publisher:Elsevier
ISSN:01654896

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