Splitting a Random Pie: Nash-Type Bargaining with Coherent Acceptability Measures

We propose an axiomatic solution for cooperative stochastic games where risk averse players bargain for the allocation of profits from a joint project that depends on management decisions by the agents. We model risk preferences by coherent acceptability functionals and show that in this setting the axioms of Pareto optimality, symmetry, and strategy proofness fully characterize a bargaining solution, which can be efficiently computed by solving a stochastic optimization problem. Furthermore, we demonstrate that there is no conflict of interest between players about management decisions and characterize special cases where random payoffs of players are simple functions of overall project profit. In particular, we show that for players with distortion risk functionals, the optimal bargaining solution can be represented by an exchange of standard options contracts with the project profit as the underlying. We illustrate the concepts in the paper by a detailed example of risk averse households that jointly invest into a solar plant.

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