DP15698 The Focusing Effect in Negotiations

Author(s): Andrea Canidio, Heiko Karle
Publication Date: January 2021
Keyword(s): Bargaining, Focusing Effect, Incomplete Agreements, negotiations, Salience
JEL(s): C78, D03, D86, F51
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15698

Two players with preferences distorted by the focusing effect (Koszegi and Szeidl, 2013) negotiate an agreement over several issues and one transfer. Our main result is that, as long as their preferences are differentially distorted, an issue will be inefficiently left out of the agreement or inefficiently included in the agreement whenever the importance of the other issues on the table is sufficiently large. When this is the case, the salience of the transfer dimension is large for both players, but differentially so, therefore creating a form of disagreement between them. In extreme cases, this could lead to an inefficient breakdown of the negotiation. Anticipating this possibility, the negotiating parties may negotiate in stages, by first signing an incomplete agreement and later finalizing the outcome of the negotiation. As in Raiffa (1982), these incomplete agreements may impose bounds on some dimensions of the bargaining solution in order to reduce their salience.