Wednesday, November 6, 2019

Mild alcohol use is shown to improve bargaining efficiency in labs; the effect does not arise from changes in mood, altruism, or risk aversion; may be caused by impairment in information processing ability, diminishing self-interest

From 2016... Deal or no deal? The effect of alcohol drinking on bargaining. Pak HungAu, Jipeng Zhang. Journal of Economic Behavior & Organization, Volume 127, July 2016, Pages 70-86.

•    Mild alcohol use is shown to improve bargaining efficiency in experiments.
•    The effect does not arise from changes in mood, altruism, or risk aversion.
•    The effect can be caused by impairment in information processing ability.

Abstract: Alcohol drinking during business negotiation is a very common practice, particularly in some East Asian countries. Does alcohol consumption affect negotiator's strategy and consequently the outcome of the negotiation? If so, what is the mechanism through which alcohol impacts negotiator's behavior? We investigate the effect of a moderate amount of alcohol on negotiation using controlled experiments. Subjects are randomly matched into pairs to play a bargaining game with adverse selection. In the game, each subject is given a private endowment. The total endowment is scaled up and shared equally between the pair provided that they agree to collaborate. It is found that a moderate amount of alcohol consumption increases subjects’ willingness to collaborate, thus improving their average payoff. We find that alcohol consumption increases neither subjects’ preference for risk nor altruism. A possible explanation for the increase in the likelihood of collaboration is that subjects under the influence of alcohol are more “cursed” in the sense of Eyster and Rabin (2005), which is supported by the estimation results of a structural model of quantal response equilibrium.

5. Concluding remarks

Given the harmful effects of excessive alcohol consumption on health are well-known, it is not clear and thereforeinteresting to investigate why aggressive business drinking has become a routine, and even an accepted culture in manycountries. In this study, we make the first attempt to study the effect of a mild amount of alcohol consumption on bargainingunder incomplete information. We find a positive effect of alcohol consumption on the efficiency of bargaining in a specificexperimental setting. Our finding suggests that consuming a mild to moderate amount of alcoholic drink in business meetings can potentially help smooth the negotiation process.

Out of the concern of health risk, the alcohol consumption of subjects in our experiment is mild relative to businessdrinking in real world. Our results still can shed useful light on understanding the effect of business drinking. First, thea lcohol intoxication effects, especially on information processing and working memory, have shown to be present even at amild dose of alcohol similar to that used in our experiment (Dry et al., 2012). Moreover, the intoxication effect is increasingin BAC up to a moderate level. We thus conjecture that a slight increase in dosage would strengthen our results. Second,the medical literature has well documented that chronic alcohol consumption makes the drinker develop tolerance to someof alcohol’s effects.20Consequently, the amount of alcohol needed to achieve a certain level of intoxication for a graduatestudent (who do not drink much typically) can be much smaller than the amount for a businessman (who drinks moreheavily and frequently).

Despite the aforementioned positive effect for a mild dose of alcohol, caution must be exercised in extrapolating theresults too far. It is well known that an excessive dose of alcohol can lead to a range of harmful effects, including aggressiveand violent behaviors (Dougherty et al., 1999), as well as impairment in problem solving ability (Streufert et al., 1993). Therefore, it is almost certain that excessive drinking would hamper efficiency in bargaining.

What are the channels through which alcohol use affects bargaining strategies and outcomes in our setting? It is commonly accepted that alcohol use lowers one’s ability to make appropriate reasoning and inference from available information. Therefore, in settings in which skepticism can lead to a breakdown in negotiation, alcohol consumption can make people drop their guard for each others’ actions, thus facilitating reaching an agreement. Our QRE estimation of a cursed equilibrium provides some support for this channel.

Other conceivable channels can be ruled out as follows. First, in line with the existing literature on the effect of alcoholuse, we find that a mild does of alcohol has little (if not zero) effect on our subjects’ risk aversion and altruism. Therefore,the increase in willingness to collaborate does not arise from a decrease in risk aversion, and/or an increase in altruism.

Second, the positive effect of alcohol in social setting has often been attributed to creating a more comforting and relaxingatmosphere. Our experiment is conducted in a laboratory, and each subject consumed the given beer individually. As such,the socializing effect of alcohol is clearly absent in our setting. Third, alcohol consumption has been suggested to have asignaling value that one is trustworthy and is ready to commit to a relationship. (See for example, Haucap and Herr (2014)and Schweitzer and Kerr (2000).) In our study, treatments are randomized and enforced by the experimenters: subjects donot get to choose whether and what type of drink to consume, so they cannot signal their private information. Whereas ourexperiment design abstracts away from the second and the third channels discussed above, future research can consideralcohol’s effects on relieving tension and building trust in a social setting.

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