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An Empirical Analysis of Bargaining with Voluntary Transmission of Private Information

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Abstract

We conduct an experimental analysis of bargaining under asymmetric information, where the dispute resolution mechanism can be interpreted as either a civil trial or conventional arbitration. In our treatment, we allow for credible and costless transmission of private information. Consistent with the theory, we find that plaintiffs with strong cases tend to reveal their private information to the defendant. As a result, this group of plaintiffs experiences a significant drop in their dispute rate under the treatment. We also consider a cheap-talk treatment under which transmitted information is not credible. When cheap talk is allowed, transmitted messages are not entirely ignored, but there is no reduction in the dispute rate for plaintiffs with strong cases.

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... They do not consider voluntary information disclosures. Pecorino and Van Boening (2004) conduct an experiment to analyze costless voluntary disclosure in a litigation model with asymmetric information. 8 The theory underlying the experiment is from Shavell (1989) . ...
... This experiment combines FOA, as in Pecorino and Van Boening (2001) and voluntary information disclosure, as in Pecorino and Van Boening (2004) . The distinguishing feature of FOA, which is that submitted proposals by both players affect the outcome should the arbitration stage be reached, makes an analysis of information disclosure particularly worthwhile. ...
... An extensive experimental literature on ultimatum and litigation games suggests that A H will indeed obtain some surplus. Pecorino and Van Boening (2004) analyze a screening model of litigation in which plaintiffs can costlessly reveal their type. Under the theory, these plaintiffs are technically indifferent between revealing and not revealing, but experimentally, 80% of plaintiffs with a strong case do indeed reveal their type. ...
Article
In Final Offer Arbitration, both parties submit a proposal to an arbitrator. In the event the parties cannot reach a negotiated settlement, the arbitrator chooses the submitted proposal that is closest to her preferred settlement. In such a model, asymmetric information can lead to costly bargaining failure. Voluntary disclosure of private information has the potential to eliminate disputes which would otherwise arise. However, the timing of this information transmission is crucial, because information can be used by the previously uninformed party to submit a superior proposal to the arbitrator. Thus, there is an incentive to conceal information if it is to be revealed prior to the submission of proposals to the arbitrator. However, information transmission should occur if it takes place after the submission of these proposals. In this paper, we test this theory experimentally and find individuals with a strong case reveal their private information in 40% of negotiations when revelation comes prior to the submission of proposals and in 60% of negotiations when revelation comes after the submission of these proposals. Moreover, information disclosure by a party with favorable information increases the rate of settlement as predicted by the theory.
... An exception to this is work testing the Priest and Klein (1984) model (e.g., Stanley and Coursey, 1990) in which both parties have private information 7 . Another exception is Pecorino and Van Boening (2004), who test a screening model in which the plaintiff can costlessly reveal her type 8 . Under the standard theory, their plaintiff would be technically indifferent between revealing and not 3 If the costs of revealing private information are sufficiently small, voluntary disclosures will be made in the signaling game (Farmer and Pecorino, 2005). ...
... While the observed A H − Y dispute rate of 36% is above the 0% predicted in P8, it is comparable to the dispute rate of 35% for A H − Y players who reveal under costless disclosure in Pecorino and Van Boening (2004 A H − Y always accepts offers exceeding 400 while rejecting 33% of those 375-400. Further analysis reveals that A H − Y rejects 67% (6/9) of the offers 375-399 but only 17% (3/18) of those equaling 400. ...
Article
We conduct an experimental analysis of pretrial bargaining, while allowing for the costly voluntary disclosure of private information in a screening game. In this game, the theoretical prediction is that costly voluntary disclosures will not occur. This hinges on the prediction that the person making the offer will extract all the joint surplus of settlement from the player making the costly disclosure. If concerns about fairness or reciprocity prevent this from occurring, then we may observe costly disclosures when none are predicted to occur. Our chief finding is that plaintiffs with a strong case reveal their private information 42% of the time, when the theoretical prediction is that they should do so 0% of the time. Fairness considerations appear to be important in explaining the deviation from theory. For a plaintiff with a strong case, the return to revealing private information is approximately zero, while theory predicts that this return should be negative.
... There is a substantial experimental literature on arbitration. Deck and Farmer (2007), Dickinson (2004, Famer and Pecorino (2004), and Pecorino and Van Boening (2001, 2004, 2010 experimentally examine various arbitration mechanisms and their impact on the probability and costs of conflict. However, in all these studies the arbitration process is not random and depends on the arbitrator's notion of fairness. ...
Article
Due to the high costs of conflict both in theory and practice, we examine and experimentally test the conditions under which conflict between asymmetric agents can be resolved. We model conflict as a two-agent rent-seeking contest for an indivisible prize. Before conflict arises, both agents may agree to allocate the prize by fair coin flip to avoid the costs of conflict. The model predicts that “parity promotes peace”: in the pure-strategy equilibrium, agents with relatively symmetric conflict capabilities agree to resolve the conflict by using a random device; however, with sufficiently asymmetric capabilities, conflicts are unavoidable because the stronger agent prefers to fight. The results of the experiment confirm that the availability of the random device partially eliminates conflicts when agents are relatively symmetric; however, the device also reduces conflict between substantially asymmetric agents.
... 2 See Shavell (1982), Neale and Bazerman (1985), Faber and Bazerman (1989), Babcock and Lowenstein (1997) and Farmer, Pecorino and Stango (2003). 3 Pecorino and Van Boening (2002) for an analysis of asymmetric information and Dickinson (2001) for an analysis of optimism. controlled laboratory experiments are presented. ...
... 2 See the following news article from the AP: http://www.msnbc.msn.com/id/13221673/ns/us_news-weird_news/ 3 There is a substantial experimental literature on arbitration. Ashenfelter et al. (1992), Deck and Farmer (2007, 2009), Dickinson (2004, 2005), Famer and Pecorino (2004), and Pecorino and Van Boening (2001, 2004, 2010) experimentally examine various arbitration mechanisms and their impact on the probability and costs of conflict. However, in all these studies the arbitration process is not random and depends on the arbitrator " s notion of fairness. ...
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Due to the high costs of conflict both in theory and practice, we examine and experimentally test the conditions under which conflict can be resolved via a random device. We model conflict as a two-agent rent-seeking contest for an indivisible prize. Before conflict arises, both agents may agree to allocate the prize by coin flip to avoid the costs of conflict. In equilibrium, risk-neutral agents with relatively symmetric conflict capabilities agree to resolve the conflict by randomization. However, with sufficiently asymmetric capabilities, conflicts are unavoidable because the stronger agent prefers to fight. The results of the experiment confirm that the availability of the random device partially eliminates conflicts when agents are relatively symmetric; however, the device also reduces conflict between substantially asymmetric agents.
... ribution which will determine the outcome at trial. Thus, each party has a piece of information that the other does not, but this analysis does not correspond to either the screening or signaling models that we analyze here. Van Boening (2004, 2011) have previously analyzed the screening model of litigation in the context of analyzing other issues. Pecorino and Van Boening (2004) analyze the role of voluntary disclosure in pretrial bargaining. They find that costless voluntary disclosures are frequently made by the party with a strong case, and this is effective in reducing dispute costs. Pecorino and Van Boening (2011) analyze the effects of shifting the distribution of dispute costs on both settlement offers a ...
Article
We present an experimental analysis of the signaling and screening models of litigation. In both models, bargaining failure is driven by asymmetric information. The difference between the models lies in the bargaining structure: In the signaling game, the informed party makes the final offer, while in the screening game the uninformed party makes the final offer. We conduct experiments for both models under a common set of parameter values, allowing only the identity of the party making the final offer to change. The predictions implied by the equilibrium refinement concept D1 are rejected by the data. This refinement requires that a plaintiff with a strong case make an offer which extracts all of the surplus from settlement from the defendant and that the defendant rejects this offers with a sufficiently high probability. D1 fails, because very high offers are always rejected. This has two consequences: Strong plaintiffs bring their offer down below the theoretical prediction in order to have some chance that the offer will be accepted. The median offer by a plaintiff with a strong case offers each party one half of the joint surplus from settlement. Another consequence of the failure of D1 is that some weak plaintiffs (contrary to theory) bluff by making a high offer. The dispute rate is predicted to be lower in the signaling game compared with the screening game, but the bluffing activity by weak plaintiffs leads to a higher dispute rate in the signaling game in our experiment. About 63% of weak plaintiffs in the signaling game make an offer which reveals their type. The median offer from this group leaves only 3% of the surplus from settlement for the defendant. Thus in contrast with the plaintiffs who have a strong case, the median offer from this group is very close to the theoretical prediction. Offers in a range containing 0 to 1/6 of the surplus from settlement are rejected only 11% of the time. Thus, fairness concerns seem to play a very limited role when an offer is made by a weak plaintiff who reveals her type. There are reasons to think that the signaling game makes greater cognitive demands on the participants. Corresponding to this, we find that anomalous offers are more common in the signaling game than in the screening game. Only 6% of the offers in the screening game appear anomalous (i.e., are of very low quality), while 21% of the offers by weak plaintiffs in the signaling game are anomalous.
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In an ultimatum game experiment, financial incentives were varied by a factor of twenty-five. Consistent with prior results, changes in stakes had only a small effect on play for inexperienced players. However, rejections were less frequent the higher the stakes and proposals in the high stakes declined slowly as proposers gained experience. The lower rejection frequency when stakes were higher can be explained by the added power of multiple observations per subject in this experiment. A model of learning suggests that the lower rejection frequency is the reason proposers in higher stakes learn to make lower offers.
K-S) test rejects the hypotheses that offers to message N and offers to message YL have the same distribution, but only at the 10% level
  • Smirnov
Smirnov (K-S) test rejects the hypotheses that offers to message N and offers to message YL have the same distribution, but only at the 10% level (0.05 < p-value < 0.10).
Bargaining Experiments
  • Alvin E Roth
Roth, Alvin E. "Bargaining Experiments." In The Handbook of Experimental Economics, edited by John H. Kagel and Alvin E. Roth, pp. 253-348. Princeton: Princeton University Press, 1995.
Also see the survey article by Roth
  • See For Further References
  • Forsythe
For further references, see Forsythe et al., footnote 7. Also see the survey article by Roth (1995).
96% of the 141 offers equal or exceed 100, and 57% exceed 125
  • Specifically
Specifically, 96% of the 141 offers equal or exceed 100, and 57% exceed 125.