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Bargaining, Fairness and the Labor Allocation Problem

Bargaining, Fairness and the Labor Allocation Problem. Paul Pecorino Mark Van Boening University of Alabama University of Mississippi. Detailing: Bilateral Bargaining. Asymmetric information “thin markets” Detailer makes offer Player B

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Bargaining, Fairness and the Labor Allocation Problem

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  1. Bargaining, Fairness andthe Labor Allocation Problem Paul Pecorino Mark Van Boening University of Alabama University of Mississippi

  2. Detailing: Bilateral Bargaining • Asymmetric information “thin markets” • Detailer makes offer Player B • Sailor knows his/her type Player A High, Low productivity Detailer: what offer to make to a given Sailor? Separating equilibrium Pooling equilibrium

  3. Detailing: Bilateral Bargaining • Problem: what if offer is rejected? Dispute = inefficient allocation • Both sides incur a cost if there is a dispute Sailor: 2nd choice, moving costs, fewer pts, etc. Detailer: performance rating, bonus, etc.

  4. Detailing: Bilateral Bargaining Dispute costs: equal or unequal? • How does the distribution of costs affect • Dispute rates • Perception as to what is a “fair” offer • Higher dispute rates = unfilled billets • “Unfair” = dissatisfaction, low retention

  5. Our Previous Research 1 Dispute Resolution Mechanisms • Theory Bebchuck (’84) asymm. info incr. disputes • Arbitration: one way to settle disputes labor, securities industry, discrimin/harrass e.g., Conventional, Final Offer • Data: We’ve conducted experiments Journal of Labor Economics Oct. ‘01

  6. Our Previous Research 2 Signaling, cheap talk • Theory Shavell (’89) incentive to reveal decr. disputes • Player with information can send message as to her type • Message may or may not be credible • Data: Another experimental test currently under review / revision

  7. The Game • 2 Players: A (AL or AH) and B • A knows her type, B knows probability • B makes offer, A decides to accept or reject • A gets payoff, B incurs cost • If A accepts, payoff = cost = offer • If A rejects, • payoff, cost depend on A’s type • both A & B incur additional dispute cost

  8. The Experiment • 5 – 7 pairs per session • A starts w/ $0, B starts w/ ~$70 • n = 13 - 14 rounds per session • Random anonymous pairing each round • Each round, A and B “play the game” • Each session, ½ the rounds have • equal dispute costs • unequal dispute costs

  9. The Experimental Game • A round consists of the following steps: • Random event: die rolled for A p(L) = 2/3 p(H) = 1 – p(L) = 1/3 • Simultaneously, B decides on an offer 0 to 599 • Offer is then shown to A; she decides whether to accept or reject • A’s decision transmitted to B; payoffs, costs computed

  10. The Payoffs and Costs • if A accepts B’s offer: A’s payoff = B’s cost = offer • if A rejects B’s offer: AL: A’s payoff = 200 – FA B’s cost = 200 + FB AH: A’s payoff = 400 – FA B’s cost = 400 + FB FA, FB are dispute costs; FA + FB is “lost”

  11. Theoretical Predictions • Assume risk neutrality • B’s offer minimizes expected cost • B makes offer AL accepts, AH rejects • B extracts A’s cost of dispute • A’s accept/reject decision • AL accepts any offer > 200 – FA • AH accepts any offer > 400 – FA • So theory predicts • B’s offer = 200 – FA • Dispute rate = p(H) = 1/3

  12. Treatment Variable • Distribution of dispute costs • Equal (baseline): FA = 75 FB = 75 • Unequal cost T1: FA = 25 FB = 125 T2: FA = 125 FB = 25 Total dispute cost = 150 • Within-session variation (randomized order) • 4 sessions with Baseline / T1 n = 371 • 4 sessions with Baseline / T2 n = 357

  13. Baseline Data (equal cost) • Player B’s offers • Session mean – predicted value: 8/8 positive; avg. diff. approx 55 (26 to 87) • Player A’s acceptance rate • AL: avg. 84% (74% to 100%) • AH: avg. 8% (0% to 25%) • Overall dispute rate approx 42% (>33%) • Generally consistent w/ theory similar to our 2 previous studies

  14. Treatment Data FA= 25, FB= 125 • B’s offers: Treatment mean – baseline mean 3/4 positive; avg. diff. approx 30 (-10 to 62) • B offers more; theory predicts +50 • B’s avg. offer still < AH’s minimum • A’s accept. rate: Treatment % – baseline % AL: avg. -12% (-41% to 2%) AH: avg. -5% (-25% to 20%) • A rejects more offers why?

  15. Treatment Data FA= 125, FB= 25 • B’s offers: Treatment mean – baseline mean 4/4 negative; avg. diff. approx -39 (-28 to -50) • B offers less, but theory predicts -100 • A’s accept. rate: Treatment % – baseline % AL: avg. -8% (-14% to 4%) AH: avg. +3% (-10% to 12%) • AL rejects more offers why?

  16. Preliminary Conclusions • Unequal dispute cost distributions do affect both the offers and the decision to accept or reject • Appears to have biggest effect on A players, especially AL players • Will Sailors expect Command to pass along cost advantages? • More thorough data analysis is needed • Consider mechanisms that mitigate problem

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