Bargaining with a Residual Claimant: An Experimental Study

We conduct an experiment of two player bargaining in which the payoff to one player is subject to ex-post risk, while the other player receives a fixed payment, effectively making the player exposed to risk a residual claimant. Contrary to intuition, recent theoretical work argues that exposure to risk may actually be beneficial to the residual claimant, and we test this in a controlled lab experiment. Our results suggest that asymmetric exposure to risk creates different (self-serving) notions of fairness for the two types of players which leads to bargaining conflict, and even disagreements. Residual claimants are able to extract a larger share of the pie when bargaining over a risky distribution. Moreover, some residual claimants actually do better in an expected utility sense by being exposed to risk. However, contrary to the theoretical prediction, it is the comparatively less risk averse residual claimants who appear to benefit the most through their exposure to risk. In a subsequent study where residual claimants are able to choose between a less risky or a more risky distribution over which to bargain, few choose the riskier distribution, except when the possibility of an ex-pose fair split exists. Consistent with our earlier results, the relatively less risk averse residual claimants are more likely to choose the riskier distribution. JEL classification codes: C71, C92, D81