Illustrated Examples of the Effects of Risk Preferences and Expectations on Bargaining Outcomes

ASU Author/Contributor (non-ASU co-authors, if there are any, appear on document)
David L. Dickinson Ph.D., Professor (Creator)
Institution
Appalachian State University (ASU )
Web Site: http://www.library.appstate.edu/

Abstract: The author highlights bargaining examples that use expected utility theory. Bargainer payoffs in the event of a dispute are represented by a simple lottery. Expectations are assumed to affect a bargainer's subjective probabilities over lottery outcomes, and risk preferences affect the expected utility of a given lottery. Risk preferences and/or expectations are predicted to influence both negotiated outcomes and the likelihood of a bargaining impasse. The analysis shows that, ceteris paribus, risk aversion or pessimism, or both, will cause a bargainer to capture less of the pie in negotiations. Similarly, risk-loving and optimistic bargainers are more likely to experience impasse because of the disappearance of the contract zone. The results are intuitive, can be shown graphically and algebraically, and provide upper-level students with engaging examples that show the usefulness of expected utility theory.

Additional Information

Publication
Dickinson, David L. (2003), Illustrated Examples of the Effects of Risk Preferences and Expectations on Bargaining Outcomes. Journal of Economic Education, 34(2): pp. 169-180. (Spring 2003) Published by Taylor & Francis. (ISSN: 2152-4068) DOI: 10.1080/00220480309595210
Language: English
Date: 2003