Definition:
Ultimatum game is an experiment. There are two players, an allocator A and a recipient R, who
in the experiment do not know one another. They have received a windfall,
e.g., of $1. The allocator, moving first, proposes to split the windfall by
proposing to take share x, so that A receives x and R receives 1-x. The
recipient can accept this allocation, or reject it in which case both get
nothing. The subgame perfect equilibrium outcome is that A would offer the
smallest possible amount to R, e.g., the share $.99 for A and $.01 for R, and
that the recipient should accept. The experimental evidence, however, is that
A offers a relatively large share to R, often 50-50, and that R would often
reject smaller positive amounts. We may interpret R's behavior has
willingness to pay a cost to punish "unfair" splits. With regard
to A's behavior -- does A care about fairness too? Or is A income-maximizing
given R's likely behavior?
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