The Kalai-Smorodinsky Solution with Loss Aversion

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Working paper
Bram Driesen , Andrés Perea and Hans Peters
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Maastricht University
We consider bargaining games under the assumption that bargainers are loss averse, i.e. experience disutility from obtaining an outcome lower than some reference point. We follow the approach of Shalev (2002) by imposing the self-supporting condition on a solution. Given a bargaining game, we say outcome z is self-supporting under a given bargaining solu- tion, whenever transforming the game using outcome z as reference point, yields a transformed game in which the solution is z.We show that n-player bargaining games have a unique self-supporting outcome under the Kalai-Smorodinsky (KS) solution. We define a bar- gaining solution, giving exactly this outcome, and characterize it by the standard axioms of Scale Invariance [SI], Individual Monotonicity [IM], and Strong Individual Rationality [SIR], and a novel axiom called Propor- tional Concession Invariance [PCI]. A bargaining solution satisfies PCI if moving the utopia point in the direction of the solution outcome, does not change this outcome.
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