Enhancing Honesty in Bargaining Under Incomplete Information: An Experimental Study of the Bonus Procedure

Authors: James Parco¹; Amnon Rapoport²

Source: Group Decision and Negotiation, Volume 13, Number 6, November 2004 , pp. 539-562(24)

Publisher: Springer

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Abstract:

The sealed-bid k-double auction mechanism for two-person bargaining under incomplete information can be extended by providing a bonus for both traders if, and only if, an agreement is reached. Brams and Kilgour (1996, Group Decision and Negotiation, 5, 239–262) proved that there is a unique level of bonus, namely, half the difference between the buyer’s bid and seller’s ask, that induces the traders to bargain truthfully. Stein and Parco (2001, unpublished manuscript) extend the theoretical work to the case of partial bonus levels that reduce, but do not completely eliminate, misrepresentation of the reservation values. In the present study, we experimentally investigate the effects of providing different bonus values on the misrepresentation of the bargainers’ reservation values. Our results show that implementation of a bonus has a significant impact on bargaining behavior but not nearly to the extent predicted by the equilibrium analysis. A reinforcement-based learning model originally proposed for the no bonus case accounts quite well for the results of all three experimental conditions.

Keywords: bargaining; sealed-bid; k-double auction; bonus procedure; truthful revelation; experiment

Document Type: Research article

DOI: http://dx.doi.org/10.1007/s10726-005-3824-4

Affiliations: 1: Department of Management, United States Air Force Academy, Colorado Springs, CO, 80840, USA, Email: james.parco@usafa.af.mil 2: Dept. of Management and Policy, University of Arizona, 405 McClelland Hall, Tucson, AZ, 85721, USA, Email: amnon@u.arizona.edu

Publication date: 2004-11-01