JOURNALOF Economic Behavior Joumal of Economic Beha Organization ELSEVIER Vol.2719 The relationship between uncertainty,the contract zone,and efficiency in a bargaining experiment Linda Babcock,George Loewenstein Xianghong Wang Carnegie Mellon Universiry.H.John Heinz Ill School of Public Policy and Management.5000 Forbes Ave,Pittsburgh.PA 15213.USA Soclal and Decision Sclences.Curnegie Mellon Universiry.Pinsburgh.PA.USA Received I November 1993:revised 13 September 1994 Abstract Research on bargaining suggests that the efficiency of bargaining is related to the size of the surplus to be divided and to uncertainty about the opponent.We conducted a bargaining which manipulated both of these facto s.We find that the pro nce o uncertainty decrea ses bargaining efficiency,while the effect of contract zone size depends on whether there is uncertainty or certainty. JEL classification:91:D82 Keywords:Bargaining:Uncertainty 1.Introduction Economic analyses of hargaining make use of the concept of a'contract zone -the range of settlement values which make both sides better off than not settling.The two critical attributes of the contract zone are the reservation values of the parties and their knowledge of their opponents'values.Although previous Corresponding author / i XlURNAL OF v. I$ Economic EIehaGor L Journal of Jkonomic Behavior and Organization 82 OqpnizAon Vol. 27 (1995) 475-485 The relationship between uncertainty, the contract zone, and efficiency in a bargaining experiment Linda Babcock a- * , George Loewenstein b, Xianghong Wang a a Curnegie Mellon University, H. John Heinz III School of Public Policy and Management, 5000 Forbes Ave. Pittsburgh, PA 15213, USA h Social and Decision Sciences, Carnegie Mellon Vniversify Pittsburgh, PA, USA Received 1 November 1993; revised 13 September 1994 Abstract Research on bargaining suggests that the efficiency of bargaining is related to the size of the surplus to be divided and to uncertainty about the opponent. We conducted a bargaining experiment which manipulated both of these factors. We find that the presence of uncertainty decreases bargaining efficiency, while the effect of contract zone size depends on whether there is uncertainty or certainty. IEL classification: C9 1; D82 Keywords: Bargaining; Uncertainty 1. Introduction Economic analyses of bargaining make use of the concept of a ‘contract zone’ -the range of settlement values which make both sides better off than not settling. The two critical attributes of the contract zone are the reservation values of the parties and their knowledge of their opponents’ values. Although previous l Corresponding author 0167-2681/95/$09.50 0 1995 Elsevier Science B.V. All rights reserved SSDI 0167-2681(95)00015-l