Understanding focal points in unstructured bargaining situations: an experimental investigation

The main objective of this research proposal is to understand how people negotiate and what aspects of the situation they use as an aid to reach an agreement. Many important economic, social, and political decisions are reached through such bargaining. Examples are a buyer and seller negotiating over the price at which to exchange an item; wage negotiations between the management and a union; the division of family household chores; agreeing on the division of fishing rights; mineral deposits, or oil fields; and the Israelis and Palestinians attempting to negotiate the terms of a peace agreement.

These bargaining situations typically involve making and rejecting proposals and sending and receiving messages. There is often no clear bargaining protocol ('rules of the game'), and for this reason these bargaining situations are often referred to as ' unstructured' bargaining situations. Unstructured bargaining situations can be contrasted with the highly structured but often stylised and unrealistic bargaining situations that have so far received most attention in the theoretical bargaining literature.

Any aspect of an unstructured bargaining situation that helps bargainers to coordinate their expectations and behavior so as to reach an agreement is called a 'focal point'. The bargaining literature has already identified several focal points. Equity and fairness have often been found to be important, as have perceived entitlements and claims. These focal points are perceived as important by negotiators because they directly matter for their money earnings. There are, however, other focal points that do not per se matter for money earnings. These focal points include historical precedence, convention, the status quo, analogy, notions of closeness, acession, uniqueness, symmetry, and even the names of the actions. We know very little about the role these focal points can play in an unstructured bargaining situation.

The purpose of this research proposal is to extend our knowledge about focal points in bargaining situations. We propose to do this by carrying out two projects:

- In some bargaining situations, such as the division of land, allocation of mineral deposits or oil fields, or the division of an inheritance, there may be no division of the valuable resource that equates money earnings and there may be no equitable outcome. Which aspects, if any, then become focal?

- In most real bargaining situations negotiators are not sure about how much others stand to gain from any given agreement. How does incomplete information about others' payoffs influence the focality of various divisions of the items?

Real unstructured bargaining situations are complex and it is difficult to find 'clean' data that allows one to isolate the role of particular factors on the observed bargaining behaviour. We shall therefore use lab experiments. This allows us to isolate the role played by a variable of interest while controlling for the influence of other potential factors.