Abstract:
We experimentally investigate bargaining between two players where one player is exposed to ex-post risk, while the other is not -- a situation frequently arising in economically important contexts. Contrary to the intuition that risk exposure is detrimental, we find that residual claimants are able to extract a risk premium, which increases in risk exposure. Under some circumstances this premium is high enough to actually make it advantageous to bargain over a risky rather than a risk-less pie. The latter effect can be theoretically identified but many behavioral aspects not captured by theory remain. First, the comparatively less risk averse residual claimants benefit the most. Second, when given the chance to choose a less or more risky distribution over which to bargain, residual claimants tend to choose the riskier one only when there is the possibility of an equal-split ex-post. Third, bargaining frictions increase as risk increases. Our results suggest that theoretical bargaining models require some separation between the determinants of bargaining power and fair compensation for risk exposure.