Risk aversion and the relationship between Nash's solution and subgame perfect equilibrium of sequential bargaining
✍ Scribed by Alvin E. Roth
- Publisher
- Springer
- Year
- 1989
- Tongue
- English
- Weight
- 734 KB
- Volume
- 2
- Category
- Article
- ISSN
- 0895-5646
No coin nor oath required. For personal study only.
✦ Synopsis
This article presents some new, intuitive derivations of several results in the bargaining literature. These new derivations clarify the relationships among these results and allow them to be understood in a unified way. These results concern the way in which the risk posture of the bargainers affects the outcome of bargaining as predicted by Nash's (axiomatic) solution of a static bargaining model (Nash, 1950) and by the subgame perfect equilibrium of the infinite horizon sequential bargaining game analyzed by Rubinstein (1982). The analogous, experimentally testable predictions for finite horizon sequential bargaining games are also presented.
This article has two primary purposes. The first is to present some new derivations of several results in the bargaining literature. These deviations clarify the relationships among these results and allow them to be understood in a unified and intuitive way. These results concern the way in which the risk posture of the bargainers affects the outcome of bargaining as predicted by Nash's (axiomatic) solution of a static bargaining model (Nash, 1950) and by the subgame perfect equilibrium of the infinite horizon sequential bargaining game analyzed by Rubinstein (1982). The second purpose of the article is to derive the similar predictions for finite horizon games, and to consider how these might be experimentally tested.
The three results from the literature, informally stated, are that 1. Nash's solution predicts that risk aversion is disadvantageous in bargaining (Roth 1979;Kihlstrom, Roth, and Schmeidler, 1981). 2. The subgame perfect equilibrium predicts that risk aversion is disadvantageous in bargaining (Roth, 1985).
*This work has been partially supported by a grant from the Russell Sage Foundation. I have also received helpful comments from Ken Binmore, Ariel Rubinstein, Asher Wolinsky, and (especially) Shmuel Zamir.