Fairness and risk in ultimatum bargaining

Abstract

We conduct an ultimatum bargaining experiment but, rather than bargaining over money, subjects bargain over lottery tickets for a mutually exclusive prize. We find that proposers offer a significantly lower percentage of lottery tickets to responders than the equivalent offer when bargaining over money. In contrast, responders have a significantly higher acceptance threshold, which is consistent with responders being risk averse and possessing ex-post fairness concerns. This difference can be rationalized if proposers have incomplete information or incorrect beliefs about responders' preferences. We provide evidence supportive of proposers holding incorrect beliefs. Specifically, we observe an incongruence between how sensitive proposers expect responders to be to regret, and how sensitive responders are. By varying the timing of responders' decision, we show that intentions matter and present evidence of an anomaly in responders' preferences. Specifically, when responders decide after the resolution of uncertainty, they are more willing to accept extreme inequality.