Tuesday, 25 February 2014

Does the ultimatum game show that fairness is important in economic transactions?

Everyone seems to think so, but I'm not so sure.  Wikipedia describes the game thus:

The ultimatum game is a game often played in economic experiments in which two players interact to decide how to divide a sum of money that is given to them. The first player proposes how to divide the sum between the two players, and the second player can either accept or reject this proposal. If the second player rejects, neither player receives anything. If the second player accepts, the money is split according to the proposal. The game is played only once so that reciprocation is not an issue.#

Typically in a lab the first player is given £1.  Rational economic agents would propose to keep £1. In fact most propose 50:50, that fact being the case again rational economic man.

Two things bother me, as someone who does not work in this area, about this conclusion.

First, in the ultimatum games, there is a pretty objective fairness, measure 50:50.  But often in real barganining situations, the notion of what is fair is not clear: try to sack someone for example, and they will tell you you are not fair and maintain that they are fair.

Second, in many bargaining/allocation issues, there is a lot of lobbying to influence the allocation Think of the time that's spend trying to minimize cuts within organizations by departments, or government departments lobbying for money.  As Milgrom and Roberts point out, organizations often devise rules that look like fair rules but are really rules to cut out lobbying which is wasteful.  There is none of this in ultimatum games.