5. Reference Dependence in Bargaining Models

It is often observed in real-life bargaining encounters and in bargaining experiments that individuals might reach a belated agreement (i.e., delay) or leave the table completely empty-handed (i.e., disagreement) (see Roth et al. 1988; Babcock et al. 1995; Gächter and Riedl 2005; Karagözoğlu and Keskin 2015; among others). Since the classical bargaining models provide little help in explaining such observed behavior, one can utilize the models of behavioral economics in order to have a better understanding of the qualitative aspects of the observed bargaining outcomes. Furthermore, since most behavioral models have additional degrees of freedom (compared to the models with standard preferences), they might be of help in explaining the quantitative aspects of the observed outcomes as well. The latter would be important especially when the distributional properties (e.g., equal and/or fair division) of the bargaining outcome are of concern. One of the behavioral models used in bargaining theory is reference dependence. This chapter surveys the literature on reference dependence in bargaining models, with a particular focus on theoretical contributions in both cooperative and non-cooperative bargaining theory.