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.