The equilibrium of a two-stage conflict game with side-payments predicts that with binding stage-one offers, proposers make and responders accept side-payments, generating settlements that strongly favor proposers. When side-payments are non-binding, proposers offer nothing and conflicts always arise. Laboratory experiments confirm that binding side-payments reduce conflicts. However, 30% of responders reject binding offers, and offers are more egalitarian than predicted. Surprisingly, non-binding side-payments also improve efficiency, although less than binding. With binding side-payments, 98% of efficiency gains come from avoided conflicts. However, with non-binding side-payments, only 49% of gains come from avoided conflicts and 51% from reduced conflict expenditures.
Kimbrough, E.O. and Sheremeta, R.M. (2010). Make him an offer he can't refuse: Avoiding conflicts through side payments. ESI Working Paper 10-21. Retrieved from http://digitalcommons.chapman.edu/esi_working_papers/110
Working Paper 10-21