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Bargaining Structure, Fairness and Efficiency

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  • Rabin, Matthew

Abstract

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.

Suggested Citation

  • Rabin, Matthew, 1997. "Bargaining Structure, Fairness and Efficiency," Department of Economics, Working Paper Series qt35g8s3dd, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  • Handle: RePEc:cdl:econwp:qt35g8s3dd
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    References listed on IDEAS

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    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. 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.
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    Cited by:

    1. Gary Charness & Matthew Rabin, 1999. "Social preferences: Some simple tests and a new model," Economics Working Papers 441, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2000.
    2. James Andreoni & Marco Castillo & Ragan Petrie, 2009. "Revealing Preferences for Fairness in Ultimatum Bargaining," Korean Economic Review, Korean Economic Association, vol. 25, pages 35-63.
    3. Andreoni,J. & Castillo,M. & Petrie,R., 2000. "What do bargainers' preferences look like? : exploring a convex ultimatum game," Working papers 25, Wisconsin Madison - Social Systems.
    4. McLeish, Kendra N. & Oxoby, Robert J., 2011. "Social interactions and the salience of social identity," Journal of Economic Psychology, Elsevier, vol. 32(1), pages 172-178, February.

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    More about this item

    Keywords

    Bargaining; Efficiency; Fairness; Inefficiency; Inequality; Ultimatum Game;
    All these keywords.

    JEL classification:

    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
    • A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
    • B49 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Other
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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