Alternating offers bargaining with loss aversion

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Working paper
Bram Driesen, Andrés Perea and Hans Peters
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Maastricht University
The Rubinstein alternating offers bargaining game is reconsidered under the assumption that each player is loss averse and the associated refer- ence point is equal to the highest turned down offer of the opponent in the past. This makes the payoffs and therefore potential equilibrium strate- gies dependent on the history of play. A subgame perfect equilibrium is constructed, in which the strategies depend on the history of play through the current reference points. It is shown that this equilibrium is unique under some assumptions that it shares with the equilibrium in the classical model: immediate acceptance of equilibrium offers, indifference between acceptance and rejection of such offers, and strategies depending only on the current reference points. It is also shown that in this equilibrium loss aversion is a disadvantage. Moreover, a relation with asymmetric Nash bargaining is established, where a player’s bargaining power is negatively related to own loss aversion and positively to the opponent’s loss aversion.
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