Fairness, Errors and the Power of Competition
journal contributionposted on 16.12.2008, 00:00 authored by Urs Fischbacher, Christina FongChristina Fong, Ernst Fehr
In this paper, we investigate the effects of competition on bargained outcomes. We show that the neglect of either fairness concerns or decision errors will prevent a satisfactory understanding of how competition affects bargaining. We conducted experiments which demonstrate that introducing a small amount of competition to a bilateral ultimatum game – by adding just one competitor – induces large behavioral changes among responders and proposers, causing large changes in accepted offers. Models that assume that all people are self-interested and fully rational do not adequately explain these changes. We show that a model which combines heterogeneous fairness concerns with decision errors correctly predicts the comparative static effects of changes in competition. Moreover, the combined model is remarkably good at predicting the entire distribution of offers in many different competitive situations.