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Bargaining Structure, Fairness and Efficiency

  • Matthew Rabin

    (University of California, Berkeley)

Experiments with the ultimatum game -- where one party can make a take-it-or-leave-it offer to a second party on how to split a pie -- illustrate that conventional game theory has been wrong in its predictions regarding the simplest of bargaining settings: Even when one party has enormous bargaining power, she may be able to extract all the surplus from trade, because the second party will reject grossly unequal proposals. But ultimatum games may lead us to misconstrue some general lessons: Given plausible assumptions about what preferences underlie ultimatum-game behavior, alternative bargaining structures that also give a Proposer enormous bargaining power may lead to very different outcomes. For virtually any outcome in which the Proposer gets more than half the pie, there exists a bargaining structure yielding that outcome. Notably, many bargaining structures can lead to inefficiency even under complete information. Moreover, inefficiency is partly caused by asymmetric bargaining power, so that "fairer environments" can lead to more efficient outcomes. Results characterize how other features of simple bargaining structures affect the efficiency and distribution of bargaining outcomes, and generate testable hypotheses for simple non- ultimatum bargaining games.

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Paper provided by EconWPA in its series General Economics and Teaching with number 0012001.

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Length: 20 pages
Date of creation: 02 Jan 2001
Date of revision:
Handle: RePEc:wpa:wuwpgt:0012001
Note: 20 pages Acrobat .pdf
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  1. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
  2. Guth, Werner & Schmittberger, Rolf & Schwarze, Bernd, 1982. "An experimental analysis of ultimatum bargaining," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 367-388, December.
  3. Akerlof, George A, 1984. "Gift Exchange and Efficiency-Wage Theory: Four Views," American Economic Review, American Economic Association, vol. 74(2), pages 79-83, May.
  4. G. Bolton, 2010. "A comparative model of bargaining: theory and evidence," Levine's Working Paper Archive 263, David K. Levine.
  5. Guth, Werner & Tietz, Reinhard, 1990. "Ultimatum bargaining behavior : A survey and comparison of experimental results," Journal of Economic Psychology, Elsevier, vol. 11(3), pages 417-449, September.
  6. Werner Guth & Reinhard Tietz, 1997. "Ultimatum bargaining behavior: a survey and comparison of experimental results," Levine's Working Paper Archive 1160, David K. Levine.
  7. Colin F. Camerer & Richard H. Thaler, 1995. "Anomalies: Ultimatums, Dictators and Manners," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 209-219, Spring.
  8. repec:tpr:qjecon:v:105:y:1990:i:2:p:255-83 is not listed on IDEAS
  9. Blount, Sally, 1995. "When Social Outcomes Aren't Fair: The Effect of Causal Attributions on Preferences," Organizational Behavior and Human Decision Processes, Elsevier, vol. 63(2), pages 131-144, August.
  10. M. Rabin, 2001. "Incorporating Fairness into Game Theory and Economics," Levine's Working Paper Archive 511, David K. Levine.
  11. Thaler, Richard H, 1988. "The Ultimatum Game," Journal of Economic Perspectives, American Economic Association, vol. 2(4), pages 195-206, Fall.
  12. W. Guth & R. Schmittberger & B. Schwartz, 2010. "An experimental analysis of ultimatum bargaining," Levine's Working Paper Archive 291, David K. Levine.
  13. repec:tpr:qjecon:v:97:y:1982:i:4:p:543-69 is not listed on IDEAS
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