Bargaining, Fairness and Conflict

Abstract

A central issue in behavioral economics is the role of fairness, and whether it is hard-wired or acquired as a result of self-interested considerations. Binmore (2020) has recently argued that fairness does not always occur, and when it does, it is caused by self-interest. The ultimatum game is well known for the sharp divergence of experimental data from theoretical predictions based on self-interest. Proposers frequently offer ‘fair’ shares of a fixed “pie” of potential earnings, and unfair offers are often rejected, which results in zero earnings for both bargainers. Slight modifications of the ultimatum game, however, can add a more realistic context for some applications, and the resulting gamesman-like behavior can yield results closer to theoretical predictions. This paper reports an experiment based on a modified ultimatum game in which rejection results in a costly conflict with a stochastic outcome. We observe gamesman-like offer behavior, especially after role reversal and learning. Conflict adds an element of competition and seems to play a role in teaching subjects what offers are appropriate – often moving demands away from fair divisions towards the game-theoretic predictions.