We consider how the outcome of bargaining varies with changes in the tradeoff between equality, Pareto efficiency, and total-earnings maximization. We observe that changes in this tradeoff have a significant and systematic impact on agreements. Subjects avoid an equal-earnings contract if it is Pareto inefficient; a large proportion of bargaining pairs avoid an equal and Pareto efficient contract in favor of an unequal and total-earnings maximizing contract, and this proportion increases when unequal contracts offer larger earnings to one of the players, even though this also implies higher inequality. Subjects often invent and use randomization devices in order to overcome conflict. Finally, we document a compromise effect that violates the independence of irrelevant alternatives condition.
Joint with Fabio Galeotti and Anders Poulsen