Rationality and Altruism in Bargaining Games: A study of ultimatum and dictator games in behavioural economics

Abstract

In an Ultimatum game, player 1 (proposer) offers a certain amount of money (proposal) from a fixed sum of money to player 2 (responder). If player 2 accepts, He/she gets that sum of money and player 1 gets the rest of the fixed sum of money. If player 2 rejects, both get nothing. A dictator game is similar but in that game, player 2 (acceptor) cannot reject the offer. Literature suggests that despite the rational offer ill this case would be the least possible amount to player 2, the offer made is much more than that on an average. This report tries to identify the components of this offer al1d formulates a few frameworks that can be used to model the components. Further, the study establishes that an offer by player l is determined by three components: the irrationality of the proposer, the altruism of the proposer and the proposer’s perception of the acceptor’s irrationality. By comparing the results of a control group playing the classic ultimatum game and another group where rational thought was induced through discussions on the rational solution to an ultimatum game. it was established that the irrational component is insignificant and does 11ot affect the proposal significantly. However, introducing an element of competition drastically reduces the proposal amount. This indicates that competition significantly eliminates the altruism component for the proposer and the offer is driven by the proposer’s perception of the irrationality of the responder. Results of the dictator game provide an indication of the average level of altruism of the proposer, since they do not have to account for the irrationality of the acceptor and are assured the remaining amount.