Title: Bargaining with Production: On the Relationship between Hard and Soft Leverage

Authors: Gary Bolton, Schwartz Professor of Business, Penn State, Smeal College of Business, Laboratory for Economic Management and Auctions (LEMA)

Abstract:

We conducted an experiment with joint production to investigate the relationship between hard leverage (the option to make binding commitment) and soft leverage (appeals to an asymmetric focal points). We induce a focal point favoring the bargainer who performs strongest in production. In separate treatments, the favored bargainer negotiates with hard leverage only, with soft leverage only or with both kinds of leverage. We find self-serving fairness bias in the interpretation of the focal point. The outcomes of the hard leverage game (without communication) reflect the high performers’ judgment of what is fair. But in all treatments, knowing the focal point provides a better forecast of outcomes than does knowing whether there is hard leverage.