The Effects of Beliefs Versus Risk Attitude on Bargaining Outcomes

In bargaining environments with uncertain disagreement or “impasse” outcomes (e.g., litigation or labor strike outcomes), there is an identification problem that confounds data interpretation. Specifically, the minimally acceptable settlement value from a risk-averse (risk-loving) but unbiased-belief bargainer is empirically indistinguishable from what one could get with risk-neutrality and pessimistically (optimistically) biased beliefs. This article reports results from a controlled bargaining experiment where data on both risk attitude and beliefs under uncertainty are generated in order to assess their relative importance in bargaining experiment outcomes. The average lab subject is risk-averse, yet optimistic with respect to uncertainty, which is consistent with existing studies that examine each in isolation. I also find that the effects of optimism dominate those of risk-aversion. Optimistic bargainers are significantly more likely to dispute and have aggressive final bargaining positions. Dispute rates are not statistically affected by risk attitude, but there is some evidence that risk aversion leads to a weakened bargaining position. Though additional research is needed to understand the limits of extending these results, a key implication follows. In uncertainty environments where optimism dominates, increased settlement rates are more likely achieved by minimizing impasse uncertainty (to limit the potential for optimism) rather than maximizing uncertainty (to weaken the reservation point of risk-averse bargainers), as has been argued in the dispute resolution literature.      

Microfinance Participation and Women's Decision-Making Power in the Household in Bangladesh

ABSTRACT

This study draws from bargaining theory to examine whether microfinance, a range of financial instruments such as micro-loans to support micro-enterprises, affects women's participation in household decision-making operationalized by whether women play a role in household decisions about large purchases, small purchases, going out to meet friends and family, and health care among a nationally representative sample of 6,150 women between the ages of 15 and 49 years in Bangladesh. Bargaining theory suggests that decision-making in households is conflictual but conflict can be mitigated through bargaining. Central to bargaining power of women is control over resources, assuming that household decision-making involves making economic decisions. Logistic regression analysis was used to test the interaction effect of microfinance and control over resources on decision-making power in the household utilizing the nationally representative Bangladesh Demographic and Health Survey 2011. Results revealed that microfinance participants with control over resources reported higher odds of decision-making power (OR = 4.3, p < 0.05) when compared to microfinance participants without control over resources (OR = 1.22, p < 0.05) but less than women who did not participate in microfinance but had control over resources (OR = 5.2; p < 0.05). In conclusion, control over resources play an important role in bargaining that increases odds of having decision-making power in the household, even for women who do not participate in microfinance. The study findings contribute to both social work practice and research on low-income populations as it allows an understanding of the importance financial access and financial know-how while it sheds light on how precarious women's lives can be as they navigate income-generating financial systems that interfere with gender norms, which may have negative consequences. These findings are particularly important for practitioners working in the area of women's empowerment who would do well to emphasize the need for building financial capability so that women are able to garner control over their own and familial resources, whether or not they participate in empowerment programs like microfinance, which in turn gives women voice and agency. Meanwhile, future researchers are well positioned to examine the kinds of specific skills that best predict increases in women's decision-making power in the household as well how gender dynamics play into the decision-making process.     

Compensation for What? An Analysis of Insurance Strategies for Repairable Assets

We define a repairable asset as an irreplaceable commodity whose quality is at risk, but can be partly restored at a cost. Examples are houses, automobiles and, especially, health, for which standard monetary approaches are oversimplified. To optimize the value of insurance, the insurer and the insured have to agree upon repair strategies (when to fix the asset and how much) and compensation rules (how much money to receive for other goods). We clarify the role of the consumer's preferences in the properties of the contract, and we highlight the relationship between repair strategies and the super- or submodular structure of the repair technology.     

Risk aversion in n-person bargaining

Relations between risk properties of Pareto optimal n-person bargaining solutions are studied. The (weak) worse alternative property, risk sensitivity property, and risk profit opportunity property are considered, in particular relations between these properties, and between these properties and other properties such as independence of irrelevant alternatives and individual monotonicity. A distinction is made between bargaining games where all Pareto optimal outcomes are riskless, and bargaining games where Pareto optimal outcomes may represent the utilities of lotteries between riskless alternatives. In the first mentioned case, more general results can be obtained.     

Giving in the face of risk

Decisions about how to share resources with others often need to be taken under uncertainty regarding its allocational consequences. Although risk preferences are likely important, existing research is silent about how social and risk preferences interact in such situations. In this paper we provide experimental evidence on this question. In a first experiment givers are not exposed to risk while beneficiaries’ final earnings may be larger or smaller than the allocation itself, depending on the realized state of the world. In a second experiment, risk affects the earnings of givers but not of beneficiaries. We find that individuals’ risk preferences are predictive for giving in both experiments. Increased risk exposure of beneficiaries tends to decrease giving whereas increased risk exposure of givers has no effect. We propose a simple non-linear generalization of a model allowing for other-regarding preferences, ex-post and ex-ante fairness, and risk aversion. We find some support for it in our data when risk is on the beneficiaries’ side but less so when risk is on the givers’ side. Our results point to the importance of the further development of models of social preferences that also incorporate risk preferences.     

A Rule For Updating Ambiguous Beliefs

When preferences are such that there is no unique additive prior, the issue of which updating rule to use is of extreme importance. This paper presents an axiomatization of the rule which requires updating of all the priors by Bayes rule. The decision maker has conditional preferences over acts. It is assumed that preferences over acts conditional on event E happening, do not depend on lotteries received on E ^c, obey axioms which lead to maxmin expected utility representation with multiple priors, and have common induced preferences over lotteries. The paper shows that when all priors give positive probability to an event E, a certain coherence property between conditional and unconditional preferences is satisfied if and only if the set of subjective probability measures considered by the agent given E is obtained by updating all subjective prior probability measures using Bayes rule.     

Bargaining Solutions as Social Compromises

A bargaining solution is a social compromise if it is metrically rationalizable, i.e., if it has an optimum (depending on the situation, smallest or largest) distance from some reference point. We explore the workability and the limits of metric rationalization in bargaining theory where compromising is a core issue. We demonstrate that many well-known bargaining solutions are social compromises with respect to reasonable metrics. In the metric approach, bargaining solutions can be grounded in axioms on how society measures differences between utility allocations. Using this approach, we provide an axiomatic characterization for the class of social compromises that are based on p-norms and for the attending bargaining solutions. We further show that bargaining solutions which satisfy Pareto Optimality and Individual Rationality can always be metrically rationalized.     

Learning-by-doing in an ambiguous environment

How well do revealed ambiguity preferences predict how people choose to seek new information about uncertain events? In an economics experiment, we apply a new instrument to measure ambiguity preferences, and in a later session observe to what extent the measure predicts the choice to receive costly information in a learning-by-doing game. Ambiguity averse subjects are more willing to pay to receive information, while risk averse subjects are not. Holding ambiguity preferences constant, risk averse subjects tend to perform worse than risk loving subjects. The returns to experimentation, especially for ambiguity averse subjects, suggest a not-well studied but important role that ambiguity preferences play in decision-making under uncertainty.     

Distributive justice of bargaining and risk sensitivity

In this paper we will point out some possibilities and limitations of the discussion of distributive justice by bargaining in the classical bargaining models.We start by considering a kind of bargaining situation where two persons with different risk aversions have to distribute a given quantity of a certain good. Then we define a model in which two bargaining situations are compared. In both situations two persons divide a quantity of a certain good; in the second situation one of the persons, say person 2, is replaced by a more risk averse person. From a well-known theorem of Kihlstrom, Roth and Schmeidler it follows that in the Nash solution, the Kalai-Smorodinsky solution and the Maschler-Perles solution person 1 prefers the situation with the more risk averse opponent.In both classes of problems the judgement of distributive justice is impossible because of an informational poverty of the classical bargaining model. We propose to integrate changes in the economic situation of the persons into the model.Therefore, in a third step, we compare two distributive situations, where differences in the situations are implied by changes in the initial endowments of the persons. Under the assumption that each person has a decreasing local risk aversion, we show that every reallocation of the initial endowments is enlarged or at least preserved by risk sensitive bargaining solutions. This fact has some significance for the discussion of distributive justice in social decision making by bargaining.     

Fairness motivation in bargaining: a matter of principle

In this paper, we study the role of fairness motivation in bargaining. We show that bargaining between two strongly fairness motivated individuals who have different views about what represents a fair division may end in disagreement. Further, by applying the Nash bargaining solution, we study the influence of fairness motivation on the bargaining outcome when an agreement is reached. In particular, we show that the bargaining outcome is sensitive to the fairness motivation of the two individuals, unless they both consider an equal division fair. We argue that our results accommodate existing experimental and field data on bargaining.     

Indecisiveness aversion and preference for commitment

We present an axiomatic model of preferences over menus that is motivated by three assumptions. First, the decision maker is uncertain ex ante (i.e., at the time of choosing a menu) about her ex post (i.e., at the time of choosing an option within her chosen menu) preferences over options, and she anticipates that this subjective uncertainty will not resolve before the ex post stage. Second, she is averse to ex post indecisiveness (i.e., to having to choose between options that she cannot rank with certainty). Third, when evaluating a menu she discards options that are dominated (i.e., inferior to another option whatever her ex post preferences may be) and restricts attention to the undominated ones. Under these assumptions, the decision maker has a preference for commitment in the sense of preferring menus with fewer undominated alternatives. We derive a representation in which the decision maker’s uncertainty about her ex post preferences is captured by means of a subjective state space, which in turn determines which options are undominated in a given menu, and in which the decision maker fears, whenever indecisive, to choose an option that will turn out to be the worst (undominated) one according to the realization of her ex post preferences.     

A characterization of the maximin rule in the context of voting

In a voting context, when the preferences of voters are described by linear orderings over a finite set of alternatives, the Maximin rule orders the alternatives according to their minimal rank in the voters’ preferences. It is equivalent to the Fallback bargaining process described by Brams and Kilgour (Group Decision and Negotiation 10:287–316, 2001). This article proposes a characterization of the Maximin rule as a social welfare function (SWF) based upon five conditions: Neutrality, Duplication, Unanimity, Top Invariance, and Weak Separability. In a similar way, we obtain a characterization for the Maximax SWF by using Bottom Invariance instead of Top Invariance. Then, these results are compared to the axiomatic characterizations of two famous scoring rules, the Plurality rule and the Antiplurality rule.     

Game-theoretic analyses of coalition behavior

Coalitions are frequently more visible than payoffs. The theory of n-person games seeks primarily to identify stable allocations of valued resources; consequently, it gives inadequate attention to predicting which coalitions form. This paper explores a way of correcting this deficiency of game-theoretic reasoning by extending the theory of two-person cooperative games to predict both coalitions and payoffs in a three-person game of status in which each player seeks to maximize the rank of his total score. To accomplish this, we analyze the negotiations within each potential two-person coalition from the perspective of Nash's procedure for arbitrating two-person bargaining games, then assume that players expect to achieve the arbitrated outcome selected by this procedure and use these expectations to predict achieved ranks and to identify players' preferences between alternative coalition partners in order to predict the probability that each coalition forms. We test these payoff and coalition predictions with data from three laboratory studies, and compare the results with those attained in the same data by von Neumann and Morgenstern's solution of two-person cooperative games, Aumann and Maschler's bargaining set solution for cooperative n-person games, and an alternative model of coalition behavior in three-person sequential games of status.

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A model of consumption-dependent temptation

The paper characterizes axiomatically a class of temptation-driven preferences. The key (but not the only) novelty of the paper is the idea that the alternative which tempts when an item x is consumed may not be the same as the alternative which tempts when another item y is consumed. For any single item to be ultimately consumed, the other items can be ranked by how much they tempt. An individual contemplates, as an alternative consumption, only the item that tempts most. The utility of a menu is then equal to the utility of the item that is consumed less a (psychological) cost of resisting temptation; this cost depends on both: the item to be consumed and the item that tempts. Unlike most of the existing literature, the axioms are imposed on deterministic menus, not on menus of lotteries.     

Multilateral negotiations over climate change policy

Negotiations in the real world have many features which tend to be ignored in policy modeling. They are often multilateral, involving many negotiating parties with preferences over outcomes that can differ substantially. They are also often multidimensional, in the sense that several policies are negotiated over simultaneously. Trade negotiations are a prime example, as are negotiations over environmental policies to abate carbon dioxide (CO₂). We demonstrate how one can formally model this type of negotiation process. We use a policy-oriented computable general equilibrium model to generate preference functions which are then used in a formal multilateral bargaining game. The case is to study climate change policy, but the main contribution is to demonstrate how one can integrate formal economic models of the impacts of policies with formal bargaining models of the negotiations over those policies.     

Risk aversion in bargaining: An experimental study

This paper reports the results of three experiments designed to test the predictions of the principal game-theoretic models of bargaining concerning the influence of risk aversion on bargaining outcomes. These models predict that risk aversion will be disadvantageous in bargaining except in situations in which potential agreements are lotteries with a positive probability of being worse than disagreement. The experimental results support the models' predictions. However, in the range of payoffs studied here, the effects due to risk aversion may be smaller than some of the focal point effects observed in previous experiments. Implications for further theoretical and experimental work are considered.     

Nonbinding recommendations: the relative effects of focal points versus uncertainty reduction on bargaining outcomes

This article focuses on the effects of nonbinding recommendations on bargaining outcomes. Recommendations are theorized to have two effects: they can create a focal point for final bargaining positions, and they can decrease outcome uncertainty should dispute persist. While the focal point effect may lower dispute rates, the uncertainty reduction effect is predicted to do the opposite for risk-averse bargainers. Which of these effects dominates is of critical importance in the design of alternative dispute resolution (ADR) procedures, which are increasingly utilized in a variety of settings. We theoretically examine the effects of recommendations on the contract zone using a framework which allows bargainers’ final positions to influence a binding outcome should negotiations fail. This provides a more stringent test of focal points than previously considered. We also present data from controlled laboratory experiments consistent with our model. Recommendations are empirically shown to influence final bargaining positions and negotiated settlement values. In fact, recommendations significantly reduce dispute rates, even where they are completely ignored in final-stage arbitration. This highlights a potentially significant role for the use of nonbinding procedures, such as mediation, as a preliminary stage in more efficient ADR procedures.     

Noise and bias in eliciting preferences

In the context of eliciting preferences for decision making under risk, we analyse the features of four different elicitation methods—pairwise choice, willingness-to-pay, willingness-to-accept, and the Becker-DeGroot-Marschak mechanism—and estimate noise, bias and risk attitudes for two different preference functionals, Expected Utility and Rank-Dependent Expected Utility. It is well-known that methods differ in terms of the bias in the elicitation; it is rather less well-known that methods differ in terms of their noisiness. It has also been reported that risk attitudes are not stable across different elicitation methods. Our results suggest that elicited preferences should only be used in the context in which they were elicited, and the bias in the certainty-equivalent methods should be kept in mind when making predictions based on the elicited preferences. Moreover, conclusions should be moderated to take into account the various methods’ noise, which is generally lowest in the case of pairwise choice.     

Changing preferences towards redistribution: How deliberation shapes welfare attitudes

The article departs from the argument that research on welfare attitudes is, so far, dominated by large‐scale survey‐studies, which allow for generalizable insights into citizens' preferences and evaluations, but are necessarily limited in their ability to capture the dynamic and contextual aspects of attitude formation. In order to broaden the horizon of welfare attitudes' research, this article introduces a new qualitative method, namely deliberative forums. In these large group discussions—originally developed for participatory decision‐making—attitudes, opinions, and preferences are core aspects of the deliberation process, and the article argues that by observing deliberation, we can observe attitude construction “in vivo ”. The evidence from a two‐day German deliberation event illustrates in an exploratory manner how information, reasoning, and group processes can influence people's evaluations and expressed policy preferences with regard to redistribution. By linking participants' answers from a survey before and after the event to their statements during the discussions, the article not only shows that the preferences for redistribution people expressed in the survey answers are often higher after the deliberative event, but also seeks to make sense of attitudinal dynamics on the basis of the qualitative material by pointing towards the role of information, reasoning, and group processes.     

The Independence Postulate,Hypothetical and Called-off Acts: a further reply to Rabinowicz

The Independence postulate links current preferences between called-off acts with current preferences between constant acts. Under the assumption that the chance-events used in compound von Neumann-Morgenstern lotteries are value-neutral, current preferences between these constant acts are linked to current preferences between hypothetical acts, conditioned by those chance events. Under an assumption of stability of preferences over time, current preferences between these hypothetical acts are linked to future preferences between what are then and there constant acts. Here, I show that a failure of Independence with respect to current preferences leads to an inconsistency in sequential decisions. Two called-off acts are constructed such that each is admissible in the same sequential decision and yet one is strictly preferred to the other. This responds to a question regarding admissibility posed by Rabinowicz ([2000] Preference stability and substitution of indifferents: A rejoinder to Seidenfeld, Theory and Decision 48: 311–318 [this issue]).