Enhancing Honesty in Bargaining Under Incomplete Information: An Experimental Study of the Bonus Procedure

Group Decision and Negotiation, Vol. 13, pp. 539-562, 2004

24 Pages Posted: 15 Oct 2004 Last revised: 22 Jul 2008

See all articles by James E. Parco

James E. Parco

Colorado College

Amnon Rapoport

University of Arizona - Eller College of Management

Abstract

The sealed-bid k-double auction mechanism for two-person bargaining under incomplete information can be extended by providing a bonus for both traders if, and only if, an agreement is reached. Brams and Kilgour (1996) proved that there is a unique level of bonus, namely, half the difference between the buyer's bid and seller's ask, that induces the traders to bargain truthfully. Stein and Parco (2001) extend the theoretical work to the case of partial bonus levels that reduce, but do not completely eliminate, misrepresentation of the reservation values. In the present study, we experimentally investigate the effects of providing different bonus values on the misrepresentation of the bargainers' reservation values. Our results show that implementation of a bonus has a significant impact on bargaining behavior but not nearly to the extent predicted by the equilibrium analysis. A reinforcement-based learning model originally proposed for the no bonus case accounts quite well for the results of all three experimental conditions.

Keywords: Sealed-bid, k-double auction, bonus procedure, truthful revelation, experiment

JEL Classification: C72, C78, D81

Suggested Citation

Parco, Jim and Rapoport, Amnon, Enhancing Honesty in Bargaining Under Incomplete Information: An Experimental Study of the Bonus Procedure. Group Decision and Negotiation, Vol. 13, pp. 539-562, 2004. Available at SSRN: https://ssrn.com/abstract=605205

Jim Parco (Contact Author)

Colorado College ( email )

Department of Economics and Business
14 E. Cache la Poudre St.
Colorado Springs, CO 80903
United States
719-389-6416 (Phone)
719-389-6927 (Fax)

HOME PAGE: http://www.coloradocollege.edu/dept/EC/parco.asp

Amnon Rapoport

University of Arizona - Eller College of Management ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-9325 (Phone)
520-621-4171 (Fax)

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