Bargaining Under Liquidity Constraints: Nash vs. Kalai in the Laboratory

59 Pages Posted: 22 Nov 2021

See all articles by John Duffy

John Duffy

University of California, Irvine

Lucie Lebeau

Federal Reserve Banks - Federal Reserve Bank of Dallas

Daniela Puzzello

Indiana University Bloomington - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November, 2021

Abstract

We report on an experiment in which buyers and sellers engage in semi-structured bargaining in two dimensions: how much of a good the seller will produce and how much money the buyer will offer the seller in exchange. Our aim is to evaluate the empirical relevance of two axiomatic bargaining solutions, the generalized Nash bargaining solution and Kalai's proportional bargaining solution. These bargaining solutions predict different outcomes when buyers are constrained in their money holdings. We first use the case when the buyer is not liquidity constrained to estimate the bargaining power parameter, which we find to be equal to 1/2. Then, imposing liquidity constraints on buyers, we find strong evidence in support of the Kalai proportional solution and against the generalized Nash solution. Our findings have policy implications, e.g., for the welfare cost of inflation in search-theoretic models of money.

Keywords: Bargaining, Monetary Economics, Experimental Economics

JEL Classification: C78, C92, D83

Suggested Citation

Duffy, John and Lebeau, Lucie and Puzzello, Daniela, Bargaining Under Liquidity Constraints: Nash vs. Kalai in the Laboratory (November, 2021). FRB of Dallas Working Paper No. 2113, Available at SSRN: https://ssrn.com/abstract=3967801 or http://dx.doi.org/10.24149/wp2113

John Duffy (Contact Author)

University of California, Irvine ( email )

Department of Economics
3151 Social Science Plaza
Irvine, CA 92697
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Lucie Lebeau

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Daniela Puzzello

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

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