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Fairness and Risk in Ultimatum Bargaining

We conduct an experiment in which subjects play an ultimatum game but, rather than bargaining over money, they 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 can be rationalized by responders being risk averse and possessing ex-post fairness concerns. That is, proposers appear to have incorrect beliefs about responders’ underlying preferences. We provide further experimental evidence that this mismatch in proposers’ beliefs and responders’ preferences is driven by an incongruence between how sensitive proposers expect responders to be to anticipated regret and how sensitive responders actually are. By varying the timing of the accept/reject decision of responders, we also show that intentions matter and present evidence of a choice anomaly in responders’ preferences. Specifically, we find that when responders can accept or reject after the resolution of uncertainty, they are much more willing to accept extreme inequality.