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Two players bargain (anonymously) to divide a fixed amount between them. P1 (proposer) offers a division of the pie P2 (responder) decides whether to accept it If accepted both player gets their agreed upon shares If rejected players receive nothing.
Ariel Rubenstein (1982) showed that there exist a unique subgame perfect Nash equilibrium solution to this problem D= ( - , )
So the rational solution was predicting that proposer should offer the smallest possible share and responder would accept it.
Since then several other studies has been conducted to examine this gap between experiment and theory. Almost all show that humans disregard the rational solution in favor of some notion of fairness*.
The average offers are in the region of 40-50% of the pie About half of the responders reject offers below 30%
A sample of 42 economics students was divided by two. By random one group was assigned to the role of player 1. The other took role of player 2 P1s had to divide a pie C which was varied between DM4 and DM10 A week later the subjects were invited to play the game again In the first experiment the mean offer was .37C In the replication after a week, the offer were somewhat less generous,but still considerably greater than epsilon. Mean offer was .32 C
Experiment 1
Experiment 2
When a responder rejects a positive offer, he signals that his utility function has non-monetary argument. When an allocator makes high offer it is either
A taste for fairness Fear of rejection Both
Will subjects sacrifice money to punish a proposer who behaved unfairly to someone else
Same subjects were told they would be matched with two of the previous proposers
One of those who took $18 for himslef (U) One of those who took $10 and split it evenly(E)
They could either get $6 and pay $6 to U Or they could get $5 and pay $5 to E 74% decided to take the smaller reward.
Some background
Replicator dynamics, is a system of deterministic difference or differential equations in bilogical models. Neutrally stable strategy
Does not require a higher payoff to win Mutant can coexist(after it appears) with a neutrally stable strategy in the system It can not replace a neutrally strategy.
Pie is set to 1 Players are equally likely to be in either of the two roles When acting as proposer, the player offers the amount p When acting as responder, the player rejects any offer less than q share kept by proposer should not be smaller than his demanding offer q as responder so 1- p>= q
Expected payoff for a player using S1=(p1,q1) against a player using S2 = (p2,q2)
1- p1 + p2 1 - p1 P2 0
p1>=q2 & P2 >= q1 p1>=q2 & p2 < q1 p1< q2 & p2>= q1 p1 < q2 & p2 < q1
In the mini game with only two possible offers l, h : 0< l < h < 1/2
Assigning four strategies G1 to G4 to G1= (l,l) : reasonable G2 =(h,l) G3 = (h,h) : fair G4 = (l,h) : gready or..
Replicator equation is used to describe the change in frequnecies x1, x2, x3 It resembels a population dynamics where successful strategies spread either by cultural imitation or biological reproduction.
Reasonable strategy G1 will eventually reach fixation Mixed population of G1 and G3 players will converge to pure G1 or G3 Mixed population of G1 and G2 players will always tend to pure G1 Mixed population of G2 and G3 players are neutrally stable
in a mixture of h-proposers, G2 and G3, G3 dominates. Depending on the initial condition, either the reasonable strategy G1, or fair strategy G3 reaches fixation In the extreme case, when we h-proposer have full information about responder, G3 reaches fixation where as mixture of G1 and G2 are neutrally stable.
In a population of n players
Individuals leave a number of offspring proportional to their total payoff Offspring adopt the strategy of their parents plus or minus some small random error
Evolutionary dynamics leads to a state where all players adopt strategies that are close to the rational strategy
like what offers have been accepted by the responder in the past,
Conclusion?!
This agrees with findings on the emergence of the cooperation and bargaining behavior.