DP5822 Prudence in Bargaining: The Effect of Uncertainty on Bargaining Outcomes

Author(s): Lucy White
Publication Date: September 2006
Keyword(s): Nash bargaining, prudence, risk aversion, Rubinstein bargaining
JEL(s): C71, C72, C78, D80
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=5822

We investigate the outcome of bargaining when a player’s pay-off from agreement is risky. 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. Strong analogies are drawn 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.