Bargaining with reference dependent preferences

Abstract

We posit that parties assess bargaining outcomes not in absolute terms but in relative terms vis a vis reference points and we assume that reference points are a ected by prior o ers. In a simple bargaining model, we illustrate how such evolving preferences may be responsible for gradualism and delay in bargaining. We observe that the resulting ine ciency may not vanish even in the limit as the cost of waiting for one more period gets very small.