Outcomes, Intentions and Interdependence: Evaluating Theories of Other-Regarding Preferences Using A Truncated Ultimatum Game

By Yoram Halevy, UBC Economics

Various theories of "other-regarding preferences'' have been shown to be consistent with a wide range of experimental results. We study the comparative-static performance of these theories in the neighbourhood of the classic Ultimatum Game, whose results are extremely robust. In order to perform the exercise, we first characterize all Perfect Bayesian Equilibria with interdependent preferences. We show that in this model, capping the demand a proposer can make may increase the proposer's demand and the responder's acceptance probability. Outcome-based theories and intentions-based models have opposite predictions. We then design and execute an experiment that facilitates almost instantaneous learning and convergence by both proposers and responders. The experimental results are consistent with the predictions of the interdependent-preference model. The economic and social implications of this result are far-reaching: low minimum wage may lower wages, and high price cap may increase the price a monopolist charges.

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