Prospect Theory,Fairness, and the Escalation of Conflict at a Negotiation Impasse* |
| |
Authors: | Topi Miettinen Olli Ropponen Pekka Sääskilahti |
| |
Institution: | 1. Hanken School of Economics, FI-00101 Helsinki, Finland;2. VATT Institute for Economic Research, FI-00101 Helsinki, Finland;3. Compass Lexecon, FI-00100 Helsinki, Finland |
| |
Abstract: | We study a bilateral negotiation set-up where, at a bargaining impasse, the disadvantaged party chooses whether to escalate the conflict or not. Escalation is costly for both parties, and it results in a random draw of the winner of the escalated conflict. We derive the behavioral predictions of a simple social utility function, which is convex in disadvantageous inequality, thus connecting the inequity aversion and the prospect theory models. Our causal laboratory evidence is, to a large extent, consistent with the predicted effects. Among other things, the model predicts that the escalation rate is higher when escalation outcomes are riskier, and that the disagreement rate is lower when the cost of escalating the conflict is higher. |
| |
Keywords: | Bargaining conflict inequity aversion loss aversion quantal response equilibrium |
|
|