CeDEx Seminar - Andrzej Baranski (Maastricht University)

An Experimental Study on the Timing of Profit-Sharing Negotiations and Production

Abstract: We propose a simple non-cooperative bargaining theory of the partnership and test it with incentivized laboratory experiments. The bargaining model and corresponding experiments consist of a negotiation phase and a production stage. Generally speaking, our model is a game of alternating offers and voting in which the surplus to divide is endogenously determined. We explore the efficiency implications (theoretically and experimentally) of two different timings: ex post bargaining, which we call redistribution, and ex ante bargaining, which we call pre-distribution. Our theoretical predictions confirm an intuitive economic tenet: in the redistribution game, investments are considered sunk and opportunistic bargaining behavior will dissuade players from investing. On the other hand, pre-distributive bargaining entails an equilibrium distribution of shares that induces at least certain members to invest in the common fund because their return is guaranteed. Experiments show opposite results: redistribution yields almost fully efficient outcomes while pre-distribution entails very inefficient outcomes.