Bargaining with Reference Dependent Preferences

Abstract

In real bargaining contexts, psychology does seem to play an important role. The game theoretic approaches to bargaining which endogenize the bargaining strategies of the parties (see Osborne-Rubinstein 1990 for a review) largely ignore psychological considerations. Psychology has pointed out a number of deviations form standard behaviors (see Rabin for a recent survey). In particular, there seems to be ample evidence that subjects’ preferences are defined relative to reference points (see Tversky and Khaneman) and that these reference points may shift over time. Several authors have investigated the effects of shifting reference points in consumption models (Gilboa Smeidler, Strahilevitz-Loewenstein). The aim of this paper is to analyze the strategic implications of shifting reference points in bargaining games a la Rubinstein. Our main hypothesis is that a player’s reference point may shift from one bargaining phase to the next, as a function of the offers received in the past. Our main finding is that bargaining parties will reach agreements gradually as opposed to immediately as a result of these shifting reference points. The ∗CERAS-ENPC, e-mail compte@enpc.fr.

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