Paper

Bargaining with a Residual Claimant: An Experimental Study

Riedl, Arno, Embrey, Matthew, Hyndman, Kyle

2019

Overview

Most negotiations involve risks that are only resolved ex-post and often these risks are not incurred equally by the parties involved. We experimentally investigate bargaining situations where a residual claimant is exposed to ex-post risk, whereas a fixedpayoff player is not. We find that residual claimants extract a risk premium, which increases in risk exposure and that this premium is sometimes high enough to make it beneficial to bargain over a risky rather than a risk-less pie. In contrast to predictions of a benchmark model, it is the comparatively less risk averse residual claimants who benefit the most and this is driven by fixed-payoff player's adoption of weak bargaining strategies when the pie is risky. It is also the less risk averse who, when given the choice, choose to bargain over a riskier distribution. We also show that as risk increases, conflict about what constitutes a fair compensation for risk exposure is enhanced, which increases bargaining frictions.

• Publisher: Federal Reserve Bank of St. Louis
• Subject: Bargaining / Economic models / Risk exposure