Another insight about human behavior is best illustrated with an experiment called the ultimatum game. The game works like this: Two volunteers (who are otherwise strangers to each other) are told that they are going to play a game and could win a total of $100. Before they play, they learn the rules. The game begins with a coin toss, which is used to assign the volunteers to the roles of player A and player B. Player A’s job is to propose a division of the $100 prize between himself and the other player. After player A makes his proposal, player B decides whether to accept or reject it. If he accepts it, both players are paid according to the proposal. If player B rejects the proposal, both players walk away with nothing. In either case, the game then ends Before proceeding, stop and think about what you would do in this situation. If you were player A, what division of the $100 would You propose? If you were player B. what proposals would you accept? Conventional economic theory assumes in- this situation that people are rational wealth-maximizers This assumption leads to a simple prediction: Player A should propose that he gets $99 and player B gets $1. and player B should accept the proposal After all, once the proposal is made, player B is better off accepting it as long as he gets something out of it. Moreover, because player A knows that accepting the proposal is in player’s B. interest, player A has no reason to offer him more than $1. In the language of game theory (discussed in Chapter 16), the 99-1 split is the Nash equilibrium Yet when experimental economists ask real people 1.0. play the ultimatum game, the results are very different from this prediction. People in the role of player B usually reject proposals that give them only $] or a similarly small amount. Knowing this, people In. the role of player A usually propose giving player B much more than $1. Some people will offer a 50-50 split, but it is more common for player A to propose giving player B an amount such as $30 or $40, keeping the huger share for himself. In this case, player B usually accepts the proposal.
What’s going on here? The natural interpretation is that people are driven in part by some innate sense of fairness. A 99-1 split seems so wildly unfair to many people that they reject it, even to their own detriment. By contrast, a 70-30 split is still unfair, but it is not so unfair that it induces people to abandon their normal self-interest Throughout our study of household and firm behavior, the innate sense of fairness Has not played any role. But the results of the ultimatum game suggest that perhaps it should, For example, in Chapters 18 and 19, we discussed how wages were determined by labor supply and labor demand. Some economists have suggested that the perceived fairness of what a firm pays its workers should also enter the picture. Thus when a firm has an especially profitable year, workers (like player B) may expect to be paid a fair share of the prize, even if the standard equilibrium does not dictate it. The firm (like player A) might well decide to give workers more than the equilibrium wage for fear that the workers right otherwise try to punish the firm with reduced effort, strikes, or even vandalism.

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