A Comparative Model of Bargaining: Theory and Evidence

TLDR

Laboratory alternating‑offer bargaining experiments reveal empirical regularities that conflict with standard theory. The author proposes that bargainers treat both goods and money as negotiable items. The model distinguishes absolute money, measured in cash, from relative money, defined by the disparity between absolute measures. The model reproduces previously observed regularities, is corroborated by new experiments, challenges several alternative explanations, and predicts that the standard‑theory equilibrium emerges in tournament‑style bargaining. © 1991 American Economic Association.

Abstract

Recent laboratory studies of alternating-offer bargaining find many empirical regularities that are inconsistent with the standard theory. In this paper, the author postulates that bargainers behave as if they are negotiating over both and money. Absolute money is measured by cash, relative money by the disparity between absolute measures. The resulting model is consistent with previously observed regularities. New experiments provide further support as well as evidence against several alternative explanations. Also finding some support is an extension that predicts that the equilibrium of the standard theory will be observed when bargaining is done in a tournament setting. Copyright 1991 by American Economic Association.