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Asymmetric Inequality Aversion and Noisy Behavior in Alternating-Offer Bargaining Games

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  • Jacob K. Goeree

    ()

  • Charles A. Holt

    ()

Abstract

In two-stage bargaining games with alternating offers, the amount of the pie that remains after a rejection is what the first player should offer to the second player, since the second player can capture this remainder in the final (ultimatum) stage. Fairness considerations will reduce the correlation between first-stage offers and the size of the remaining pie, but randomness in behavior will have the same "flattening" effect. This paper reports an experiment designed to separate these considerations, by introducing asymmetric fixed money payments to each player. These endowments do not affect the perfect positive correlation between initial Nash offers and the remaining pie, but are selected to induce a perfectly negative relationship between the remaining pie size and the first-stage offer that would equalize final earnings of the two players. This negative relationship is apparent in the data, which suggests the importance of fairness considerations. A theoretical model of asymmetric inequality aversion and stochastic choice is used to provide maximum likelihood estimates of utility and logit error parameters. The parameters representing "envy," "guilt," and logit errors are all significant, and the resulting model produces the observed negative relationship between initial offers and residual pie size.

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Bibliographic Info

Paper provided by University of Virginia, Department of Economics in its series Virginia Economics Online Papers with number 329.

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Length: 13 pages
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Handle: RePEc:vir:virpap:329

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Web page: http://www.virginia.edu/economics/home.html

Related research

Keywords: bargaining; ultimatum game; bounded rationality; logit equilibrium; fairness; equity aversion; endowment effects; envy; guilt;

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  1. Anderson, Simon P. & Goeree, Jacob K. & Holt, Charles A., 1998. "A theoretical analysis of altruism and decision error in public goods games," Journal of Public Economics, Elsevier, vol. 70(2), pages 297-323, November.
  2. C. Monica Capra, 1999. "Anomalous Behavior in a Traveler's Dilemma?," American Economic Review, American Economic Association, vol. 89(3), pages 678-690, June.
  3. M. Rabin, 2001. "Incorporating Fairness into Game Theory and Economics," Levine's Working Paper Archive 511, David K. Levine.
  4. Ochs, Jack & Roth, Alvin E, 1989. "An Experimental Study of Sequential Bargaining," American Economic Review, American Economic Association, vol. 79(3), pages 355-84, June.
  5. Charles A. Holt & Jacob K. Goeree, 1999. "Stochastic Game Theory: For Playing Games, Not Just for Doing Theory," Virginia Economics Online Papers 306, University of Virginia, Department of Economics.
  6. Bolton, Gary E, 1991. "A Comparative Model of Bargaining: Theory and Evidence," American Economic Review, American Economic Association, vol. 81(5), pages 1096-136, December.
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