Seminars

Abstract: This paper investigates what constitutes a reference point in a bargaining environment and how it affects bargaining outcomes. An ultimatum game experiment, which utilizes a novel matching protocol that facilitates fast learning and equilibrium play, is employed to empirically identify the reference points. These are uncovered by studying the comparative statics effect on equilibrium play of an exogenous floor imposed on offers. The experimental results demonstrate that when the floor is binding, responders' conditional acceptance rates increase, and proposers' offers decrease (up to the floor). Standard models of other-regarding or reference-dependent preferences cannot account for these findings. A bargaining model between heterogeneous loss-averse agents with simplified other-regarding concerns, whose equilibrium reference point is the highest payment agents can garner with certainty is proposed, and is shown to be consistent with the experimental results. It is suggested that common economic environments may induce similar endogenous reference points, whose effect on bargaining outcomes has not been studied systematically.