Sunk costs and fairness in incomplete information bargaining

We study a bilateral trading relationship in which one agent. the seller, can make a nonrecoverable investment in order to generate potential gains from trade. Afterwards, the seller makes a price offer that the buyer can either accept or reject. If agents are fairminded. sellers who are known by the buyer to have high investment costs are predicted to charge higher prices. If the investment cost is private information, low-cost sellers should price more aggressively and high-cost sellers less aggressively than under complete information, giving rise to disagreement and/or underinvestment. Our experiment support these predictions. (C) 2004 Elsevier Inc. All rights reserved.