Abstract

We analyze the time pattern of bargaining outcomes in ransom negotiations with Somali pirates, using a unique data set with a comprehensive coverage of kidnapped ships in 2002-2012. We find that, even when controlling with ship characteristics, negotiated ransoms initially increased by a large magnitude, followed by negotiation durations sharply increasing as well. In the last years of the time period, both average ransom levels and negotiation durations seemed to stabilize. We argue that the main force behind these changes was learning by the pirates about the distribution of valuations of the buyers (ship owners). To investigate this issue theoretically, we analyze a model involving a sequence of negotiations with different buyers and sellers, in which buyers’ valuations are drawn independently from the same distribution, initially unknown to the sellers. Sellers observe past negotiations and update their beliefs on the distribution accordingly. We provide conditions under which over time sellers learn the true distribution of valuations. We use our model framework for structural estimations and find that pirates’ beliefs over time did move closer to the true distribution of valuations, although not all the way. We use the estimated parameters of the model for welfare analysis and investigation of counterfactual scenarios such as bargaining outcomes with pirates starting out with correct beliefs.

Bio

My research focuses on a wide range of subjects including game theory, experimental economics, microeconomic theory, industrial organization, political economics, development economics and economic history. I have received various grants from the National Science Foundation. My most recent work has been published in the Quarterly Journal of Economics, Theoretical Economics, the Journal of Political Economy, the Journal of Economic Theory, and The American Economic Journal: Microeconomics.

Picture: https://sites.duke.edu/attilaambrus/