Abstract
We augment the Nash bargaining solution by fairness ideals in order to predict the outcomes of unstructured bargaining after the individual production of a joint surplus. If production depends on individual effort, talent, and luck, fairness ideals might be based on the accountability principle. In a lab experiment with real production and unstructured bargaining, we investigate subjects’ fairness ideals, their bargaining behaviour, and the outcomes of the bargaining process. As impartial spectators, about 75% of the subjects hold meritocratic or libertarian fairness ideals. However, these ideals do not affect their bargaining behaviour which is strongly opportunistic. Therefore the fairness-augmented Nash solution with opportunistic fairness ideals predicts the bargaining outcome best.
Highlights
Most bargaining proceeds in an unstructured way
Since not all subjects give answers that are consistent with a unique fairness ideal across the different questions, we compute the distance between the chosen hypothetical allocations and the ones predicted by the fairness ideals
We find that subjects hold fairness ideals that can be classified as choice egalitarian, meritocratic or libertarian
Summary
Most bargaining proceeds in an unstructured way. In many cases, for instance when at least one bargaining partner is not a professional or when the partners meet for the first time or never again in the future, there are no institutions that determine when the partners can make offers or that mandate that new offers must always be more generous to the partner than previous ones. Cappelen et al (2007, 2010, 2011) made an important contribution to the experimental literature showing that the 50:50 split frequently observed in ultimatum and dictator games without production is less frequent in experiments in which the surplus was endogenously produced These authors argue that if the payoff to be distributed was produced by the bargaining parties instead of exogenously given to the players like “manna from heaven” fairness considerations come into play. Our paper is related to Cappelen et al (2007, 2010, 2011), but while these authors use the dictator game in their experiments we focus on how fairness considerations affect economic behaviour in unstructured bargaining situations.
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