SFB 303 Discussion Paper No. B - 319
Author: Binmore, Ken, Chris Proulx, Larry Samuelson, and Joe Swierzbinski
Title: Hard Bargaining and Lost Opportunities
Abstract: We examine an Outside Option Game in which player I submits a claim for
a share of a cake while player II simultaneously either makes a claim or
chooses to opt out. If player II opts out, then she receives an opt-out
payment while player I receives nothing. If player II opts in and if the
claims total less than the cake, then each player receives his or her claim
plus half of the surplus. If the claims total more than the cake, both
players receive zero. Tension arises in this game between player I's desire
to seek as large a share of the cake as possible and the necessity of
providing player II with a sufficiently large payoff to ensure that she will
opt in. Economic theories that stress efficiency predict that player II will
opt in. We argue that trial-and-error learning processes can teach the
competitive skills needed to secure large shares of the cake more
effectively than the cooperative skills needed to ensure that the cake is
available to be divided. As a result, outcomes will arise in which player II
opts out, especially when the payment from doing so is attractive. We
conduct experiments in which player IIs commonly opt in when their opt-out
payment is small, but frequently opt out for larger opt-out payments.
Keywords: Bargaining, Coase Theorem, Evolutionary Games, Drift
JEL-Classification-Number: C70, C72
Creation-Date: June 1995
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