What Price Compromise? Testing a Possibly Surprising Impliction of Nash Bargaining Theory

Abstract

This paper provides a very simple experimental test of a prediction of Nash Bargaining Theory that seems counterintuitive. The context is a simple bargaining problem between two players who have to agree a choice from three alternatives. One alternative favors one player and a second favors the other. The third is a fair compromise, but is excluded as an agreed choice by Nash Bargaining Theory. Our experimental results show that agreement on this third outcome occurs rather often. So the Nash theory is not well-supported by our evidence, although neither is a Strategic explanation of the data. The Nash-precluded outcome appeals because of its compromise nature; indeed, players are prepared to pay a price which is (according to the Nash theory) irrationally high, in order to reach a fair compromise.