What Price Compromise? Testing a Possibly Surprising Implication of Nash Bargaining Theory

This paper identifies, and tests experimentally, a prediction of Nash Bargaining Theory that may appear counterintuitive. The context is a simple bargaining problem in which two players have to agree a choice from three alternatives. One alternative favours one player and a second favours the other. The third is an apparently reasonable compromise, but is in fact precluded as an agreed choice by the axioms of Nash Bargaining Theory. Experimental results show that agreement on this third alternative occurs rather often. So the axiomatic Nash theory is not well-supported by our evidence. Our subjects' behaviour could be interpreted as the paying of an irrationally (according to the Nash theory) high price in order to reach a compromise agreement.