Endogenous versus Exogenous Fairness Indices in Repeated Ultimatum Games

Abstract

In ultimatum games, we often observe some participants rejecting offers that may be normally viewed as “fair” while others accept even lower offers that are typically viewed as “unfair”. The objective of this study is to construct and examine an endogenous fairness index that helps explain this phenomenon. To achieve this objective, we construct a repeated ultimatum game environment in which each participant plays the roles of both the sender and the receiver with two different participants. We conjecture that the ratio of the amount that an individual receives divided by the amount the individual sends, captures the benchmark of what constitutes a fair offer for that individual when an offer-acceptance decision has to be made. Our design includes a fixed- and random-partners treatment in the repeated ultimatum game as an attempt to identify and isolate the effects of social distance on offer-acceptance decisions. In addition to the inclusion of the fairness indices in the offer-acceptance models, we introduce measures of social value orientations and risk attitudes as control variables in our analyses. We find that our belief-related fairness index is, in some cases, a better explanatory variable for offer-acceptance decisions than the conventional “offer index” and in other cases significantly augments the “offer index”. As well, the offer-acceptance model including the belief-related fairness index can account for likelihoods of accepting less fair offers that can, at times, exceed likelihoods of accepting more fair offers.