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Prospect Theory, Fairness, and the Escalation of Conflict at a Negotiation Impasse *
Author(s) -
Miettinen Topi,
Ropponen Olli,
Sääskilahti Pekka
Publication year - 2020
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/sjoe.12384
Subject(s) - negotiation , inequity aversion , economics , disadvantaged , microeconomics , prospect theory , set (abstract data type) , de escalation , function (biology) , inequality , political science , programming language , evolutionary biology , computer science , biology , economic growth , mathematical analysis , mathematics , law
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.