Earned Entitlements and Risky Investments in Bargaining: An Experiment

Abstract
In various organizational settings, a team member is given the authority to make a (safe or risky) investment decision that influences the value of the surplus jointly produced by the team. We experimentally investigate the effect of (i) asymmetric status gained through contributions to the surplus, (ii) risky investment decisions, and (iii) the outcome of these investment decisions on bargaining process and outcomes in an organizational setting. Agents’ initial contributions to the bargaining surplus are determined by their performances in a real-effort task. Then, in three treatments, the final value of the surplus is determined as a result of an exogenous shock, an investment decision made by the low contributor, and by the high contributor. Our main results show that (i) low contributors benefit (in bargaining) from making the risky investment choice and (ii) when low contributors make the investment decision, their shares of the bargaining surplus in agreements are affected by whether the risky investment turns out to be successful or not, whereas this is not true for high contributors when they make the decision. These observations point toward the possibility that in our sample there is no categorical opposition to low contributors’ risk-taking on behalf of the group. Nevertheless, following the realization of the risky investment outcome, high contributors and low contributors are treated differently: low contributors are punished for failure and rewarded for success whereas high contributors are granted a fixed share of the surplus independent of the outcome. A multi-layered analysis of the bargaining process provides insights into differences in behavior. Joint paper with Mürüvvet Büyükboyacı and Serkan Küçükşenel.