Abstract: Recent results have shown that, for bargaining over the distribution of commodities, or other riskless outcomes, Nash's solution predicts that risk aversion is a disadvantage in bargaining. Here we consider bargaining games which may concern risky outcomes as well as riskless outcomes, and we demonstrate that, in such games, risk aversion need not always be a disadvantage in bargaining. Intuitively, for bargaining games in which potential agreements involve lotteries which have a positive probability of leaving one of the players worse off than if a disagreement had occurred, the more risk averse a player, the better the terms of the agreement which he must be offered in order to induce him to reach an agreement, and to compensate him for the risk involved. For bargaining games whose disagreement outcome involves no uncertainty, we characterize when risk aversion is advantageous, disadvantageous, or irrelevant from the point of view of Nash's solution. SEVERAL INVESTIGATORS have considered how risk aversion influences the outcome of bargaining, as modelled by Nash's model of bargaining, and related models. Loosely speaking, Kannai [3] noted that when bargaining concerns distribution of a divisible commodity between two risk averse individuals, then Nash's solution assigns a larger share of the commodity to a bargainer as his utility function becomes less risk averse. Thus, risk aversion is a disadvantage in this situation, according to Nash's model. Kihlstrom, Roth, and Schmeidler [5] and Roth [11] generalized this observation to the case where the bargaining concerns selecting a single outcome from a set of riskless outcomes on which the two bargainers each have concave utility functions. Risk aversion is again a disadvantage. This has been elaborated by Sobel [14], who considers the case of bargaining over the distribution of several divisible commodities. Thomson [15] has independently reported related results. All these results find risk aversion to be a disadvantage in bargaining over a set of riskless outcomes. This intuitively plausible relationship between an individual's bargaining ability and his propensity for risk-taking has been established only for bargaining situations whose potential outcomes involve no risk. This paper concerns the more general case, in which bargaining may be over risky as well as riskless outcomes (however, we consider only the case in which the disagreement outcome is riskless). In some cases, risk aversion continues to be a disadvantage in bargaining; in some cases, it has no influence; and in some cases, risk aversion turns out to be an advantage. Intuitively, for bargaining games in which potential agreements involve lotteries having a positive probabil
Publication Year: 1982
Publication Date: 1982-01-01
Language: en
Type: article
Access and Citation
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot