Does competition affect social preferences in a bargaining game?
Since the first day learning economics, we all remember the most basic presumption of classical economic theory that individuals’ decision making are entirely driven by their material self-interest and there is nothing related to “social goals”. Many pieces of evidence have proved that it is true for some people in some circumstances, but not represent the whole human kind. Adam Smith, the father of “The Invisible Hand”, did write these lines in his book, “The Theory of Moral Sentiments”:
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“How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it”
Are people really that selfish or they are actually fair-minded and cooperative in the end? Why do we trust in each other and why we still contribute ourselves and engage in community work? Reality has shown that actually, we also care about the fairness and people are more cooperative than is assumed in self-interest model. Social preferences, which is “how people rank different allocations to themselves and others” (Drouvelis, 2013), have a significant impact in decision-making process of agents in a number of economic settings, like charity, community work and bargaining. Thus, studying on social preferences and how they interact with material incentives will help improve the ability to predict behaviour as well as make policy recommendations. This paper will summarize several empirical experiments to find out how competition affect social preferences in the framework of a bargaining game: ultimatum game.
Bargaining is a kind of negotiation, which normally occurs when there is a trade, in which the buyer and seller debate the price and the basic nature of that transaction. Bargaining is a frequent part of our daily life, when an employee bargains for a higher salary, or when the owners of a company negotiate with his striking workers. At the end of the bargaining process, one party makes a “take it or leave it” offer. If that ultimatum offer is accepted, then it leads to a resolution. Otherwise, sometimes both sides have to suffer substantial financial losses. Under the limited scope of this essay, we will only look at the simplified version of the ultimatum game.
In this game, players will be divided into proposers and responders (receivers) and then bargain about the distribution of a fixed amount of money. Firstly, the proposer has to offer a share of the initial surplus to the responder. After considering if the share is fair enough, the responder can accept or reject. In case of acceptance, the receiver will receive the offered amount and the proposer will receive the remaining part of the initial amount. In case of a rejection, both players receive nothing.
In 1982, the first experimental test of the “ultimatum game” had been conducted by Guth, Schmittberger and Schwarze, three economists at the University of Cologne, who were studying bargaining behaviour. Back then, Guth and his colleagues recruited a group of graduate students and group them up to form 21 pairs. The proposer was given a fixed sum S of money and he had to announce a split of that amount between himself and a responder .After considering if the offer x is fair enough, the responder can accept or reject. In case of acceptance, the receiver will receive the offered amount x and the proposer will receive the remaining part S-x of the initial amount. In case of a rejection, both players receive nothing. At the first sight, the game was expected to be easy if all of the responders only care about their material outcomes, they will be willing to accept any positive offer and the proposer will offer the minimum amount to get the most. It also means that there will be a unique Nash equilibrium when the proposer offers nearly zero and the responder still acc