You May Have to Do it Again, Rocky! - an Experimental Analysis of Bargaining with Risky Joint Profits

Abstract

We present an experimental study of a risky sequential bargaining to model negotiations in risky joint ventures that proceed through multiple stages. Our example is the production of a movie that may give rise to a sequel, so actors and producers negotiate sequentially. We compare the predictions of alternative theoretical approaches to understanding such a game. The game theoretic solution predicts (assuming risk neutrality) that actors are willing to accept wages below their outside option for first films in order to capture the gains from winning lucrative sequel contracts. This prediction is strongly rejected by the data. The data are better explained by either equity theory (equal splits) or by a game theoretic model where actors have uncertain risk aversion. The parameters of the game are calibrated to match data on 99 movies for 1989 available from a case study.

Keywords: Bargaining, risk, joint ventures, game theory