Prospect Theory, Fairness, and the Escalation of Conflict at Negotiation Impasse

Topi Miettinen, Olli Ropponen, Pekka Sääskilahti

Research output: Contribution to journalArticleScientificpeer-review

1 Citation (Scopus)


We study a bilateral negotiation setup where at bargaining impasse the disadvantaged party chooses whether to escalate the conflict or not. Escalation is costly for both parties and it results in a random draw of the winner of the escalated conflict. We derive the behavioral predictions of a simple social utility function which is convex in disadvantageous inequality, thus connecting the inequity aversion and the prospect theory models. Our causal laboratory evidence is to a large extent consistent with the predicted effects. Among other things, the model correctly predicts that the escalation rate is higher when escalation outcomes are riskier and the disagreement rate is lower when the cost of escalating the conflict is higher.
Original languageEnglish
Peer-reviewed scientific journalThe Scandinavian Journal of Economics
Publication statusPublished - 23.05.2019
MoE publication typeA1 Journal article - refereed


  • 512 Business and Management
  • Bargaining
  • conflict
  • inequity aversion
  • loss aversion
  • quantal response equilibrium

Areas of Strength and Areas of High Potential (AoS and AoHP)

  • AoS: Competition economics and service strategy - Quantitative consumer behaviour and competition economics


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