Information in Repeated Ultimatum Game with Unknown Pie Size

Within existing literature, it is well known that people’s behavior in ultimatum game experiments cannot be explained by perfect rationality model. There is, however, evidence showing that people are boundedly rational. In this paper, we studied repeated ultimatum game experiments in which the pie size is only known to the proposer (player 1), but the transaction history is made known to both players. We found that subject’s behavior can be very well explained by the history-consistent-rationality model (HCR model) of Lee and Ferguson (2010), which suggests that people’s behavior is affected by what they observed in the past. The HCR model is able to yield point predictions whose errors are on average within 5% of the total pie size. The experimental results provide evidence that subjects' behavior is boundedly rational with respect to the transaction history. 1. Introduction Within the existing ultimatum game literature, it is widely held by economists that game theory fails to predict the subjects' behaviors accurately. Implicit in this evidence are the conjecture of altruistic concerns and the matter of fairness (see, e.g., [1, 2]). While it is commonly known that the decision of accepting or rejecting an offer in ultimatum games depends on respondent's tolerance of unfairness, there have been no prescriptive models in the literature for suggesting the optimal offer that proposer should propose. In this paper, we demonstrate that the history-consistent rationality (hereafter, HCR) model can give point prediction to the proposer's offer in the ultimatum game. This kind of quantitative prediction is different from the past literature which focuses on qualitative prediction. Our research contributions are of twofold. First, our experimental design simulates the real market condition to allow us to better understand how the real economy works. In the existing literatures, scholars have studied ultimatum games with asymmetric information to approximate the real life bargaining situation, as people often do not know how much there is at stake for the other person [3–5]. In our research, we replicate the real market condition by further allowing market information to be available to every subject in the experiment. Consider a person purchasing a house, he would certainly collect market information to bargain for a better deal, because the reservation price of the house owner is usually unknown to the buyer. In each session of our experiments, there are eighteen to twenty pairs of subjects, playing repeated ultimatum games up to twenty periods. The market