Self-Serving Biases in Bargaining

There is strong evidence that in bargaining situations with
asymmetric outside options people exhibit self-serving biases
concerning their fairness judgements. Moreover, psychological
literature suggests that this can be a driving force of bargaining
impasse. This paper extends the notion of inequity aversion to
incorporate self-serving biases due to asymmetric outside options
and analyses whether this leads to bargaining breakdown. I
distinguish between sophisticated and naive agents, that is, those
agents who understand their bias and those who do not. I find that
breakdown in ultimatum bargaining results from naiveté of the
proposers.