The Effect of Sunk Costs on the Outcome of Alternating-Offers - Bargaining between Inequity-Averse Agents

The paper analyzes the infinite-horizon alternating-offers bargaining game between agents with inequity-averse preferences. Without prior investments,nthe model predicts a shift of the outcome towards equal division. Asymmetricninvestments affect the ex-post bargaining outcome, giving an advantage to the party that contributed more. Under suitable circumstances, this effectnmay significantly mitigate the hold-up problem. In fact, in a symmetric setup, if production is sufficiently profitable, and parties are sufficiently patient, then the first-best investment levels can be approximated without a co