15 - Ultimatum game

Question 1

what is the ultimatum game

Answer 1

• 2 players
• T = total sum of money
• proposer and responder
• proposer makes an offer
• responder decides if it wants to accept terms, reject (both take home nothing)

Question 2

what is the standard solution of ultimatum game

Answer 2

• if players motivated by only own money payoffs
• by backwards induction
• responder will always accept even it is 1p
• proposer will offer the smallest amount possible
• responder will get 1p
• proposer will get pretty much everything

Question 3

what are the typical findings of ultimatum game
one shot game

Answer 3

• 40% average offer of T
• offers above 50% are rare
• offers of 50% are common
• some offers rejected
• offers less than 20% rejected frequently

Question 4

what we see happens compared to standard

Answer 4

• proposer makes more nicer proposals
• responder rejects positive offers

Question 5

why would responders reject money
- not max their own payoff

Answer 5

because of other-regarding preferences

• reciprocity
• aversion to inequality

Question 6

what is Dufwenberg reciprocity model

Answer 6

• overall utility is a weighted sum of material payoffs and reciprocation payoff
• role of perceived intentions

Question 7

how does reciprocity play in the ultimatum game

Answer 7

• if low offer is seen as unkind
• responder with strong enough reciprocal preference will reject
• they will gain utility by rejecting

Question 8

what is Fehr Schmidt preferences
aversion to inequality

Answer 8

• aversion to both directions of inequality - more so when unfavourable
• attitudes are to money outcomes (not perceived intentions like reciprocity)
• money outcomes but not just money to self - matters how much money the other person has

Question 9

how does aversion to inequality play in the ultimatum game

Answer 9

if is unfavourable inequality averse then will reject low offers

• if they have Fehr Schmidt preferences

Question 10

responder IC

Answer 10

• point where they are indifferent between 0 money and share of T
• on left = will reject
• on right = will accept
• will defo accept 1/2 = no inequality

Question 11

proposer IC

Answer 11

• upward sloping below equality line
• will never propose more than 1/2
• will never offer less than s* - will defo be rejected
• the offer depends on slope of proposer IC above the equality line
• shallow slope = offer s*
• steep slope = offer 1/2

Question 12

how well does FS preferences explain what we see in ultimatum game

Answer 12

• why low offers are rejected
• why 50% is common
• why offers > 50 are rare
• some people offer s*
• the people that are more inequality averse offer 50

Question 13

2 experiments that change the game by restricting the players

Answer 13

• Forsythe 1994 = restrict responder
• Falk 2003 = restrict proposer

Question 14

Forsythe Horowitz Savin Sefton (1994)

dictator game

how have they changed the game

Answer 14

• responder has no option but to accept
• no threat of rejection anymore

Question 15

differences in results between
Forsythe 1994 and ultimatum game

Answer 15

• ultimatum
• big spike at 50% - FS preferences
• dictator
• biggest spike at 0
• 60% do offer something

Question 16

is giving positive offers in dictator and ultimatum game explained fully by preferences

Answer 16

• dictator giving is not explained by reciprocity - because there is no retailiation from responder
• giving is not fully consistent with FS - would still expect people to give positive sums if they were averse to inequality - IC dont change

Question 17

what are the implications of the
Forsythe dictator game

Answer 17

1. offers in ultimatum game are not driven fully by preferences - could be out of fear of rejection
2. but fear of rejection doesnt explain positive offers fully because still some in the ultimatum game

Question 18

Falk Fehr Fischbacher (2003)
design
restrict the proposer

Answer 18

• 4 games like ultimatum game
• proposer can only choose between 2 offers (20% or one other offer out of 0,20,80,50) depending on each treatment
• responder knows the options that the proposer was choosing between
• responders behaviour for both possible options elicited using strategy method
• each subject plays all 4 treatments

Question 19

what are the predictions of FFF 2003

standard
reciprocity
FS preferences

Answer 19

standard = 20% offer never be rejected

FS preferences = rejection rate of 20% offers should be the same across all treatments - rejection rate shouldnt depend on the values of the alternative offer

reciprocity = rejection rate of 20% offer may vary across treatments if responders view of proposers intentions depends on alternative offer - changes how kind/unkind you see them
- no rejection when alternative offer is 20 or 0 = kind

Question 20

FFF findings

which preferenees

Answer 20

• reject game theory prediction - because people do reject 20% offers
• rates of rejection are not all the same - against FS preferences
• more rejection when the alternative offer was 50/50 that wasnt chosen - in line with reciprocity
• still rejection of 20% when it is not seen as unkind - against reciprocity

Question 21

after looking at the 2 studies
can reciprocity and inequality aversion preferences explain the findings

Answer 21

no