Bargaining with a Residual Claimant: An Experimental Study

56 Pages Posted: 10 Dec 2014

See all articles by Matthew Embrey

Matthew Embrey

University of Sussex, Department of Economics

Kyle B. Hyndman

University of Texas at Dallas

Arno Riedl

Maastricht University; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Netspar

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Date Written: November 30, 2014

Abstract

We experimentally investigate a bargaining environment in which players negotiate over a fixed payment to one player, while the other player receives the residual from a random pie realization after subtracting the fixed payment. Contrary to the intuition that risk exposure is detrimental, we show that residual claimants are able to extract a risk premium, which is increasing in risk exposure. In some cases the premium is so high that it is advantageous to bargain over a risky pie rather than a risk-less pie. Contrary to theory, the comparatively less risk adverse residual claimants benefit the most. Moreover, bargaining frictions increase as risk increases, and we document more frequent disagreements as risk increases. When given the chance to choose a less or more risky distribution over which to bargain, residual claimants tend to choose the more risky distribution only when there is the possibility of an equal-split ex-post. Our results suggest that theoretical bargaining models require some separation between the determinants of bargaining power and fair compensation for risk exposure.

Keywords: bargaining, ex-post risk, reference points

JEL Classification: C710, C920, D810

Suggested Citation

Embrey, Matthew and Hyndman, Kyle B. and Riedl, Arno M., Bargaining with a Residual Claimant: An Experimental Study (November 30, 2014). CESifo Working Paper Series No. 5087, Available at SSRN: https://ssrn.com/abstract=2536280

Matthew Embrey

University of Sussex, Department of Economics ( email )

Falmer, Brighton BN1 9SL
United Kingdom

HOME PAGE: http://www.sussex.ac.uk/economics/people/peoplelists/person/363998

Kyle B. Hyndman (Contact Author)

University of Texas at Dallas ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Arno M. Riedl

Maastricht University ( email )

Department of Economics (AE1)
P.O. Box 616
Maastricht, 6200 MD
Netherlands

IZA Institute of Labor Economics

P.O. Box 7240
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Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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