An Experimental Study on Dividing Gains through Politics
| Author | Li‐Chen Hsu,Kamhon Kan,Chun‐Lei Yang,C.C. Yang |
| Date | 01 November 2015 |
| DOI | http://doi.org/10.1111/sjpe.12084 |
| Published date | 01 November 2015 |
AN EXPERIMENTAL STUDY ON
DIVIDING GAINS THROUGH POLITICS
Li-Chen Hsu*, Kamhon Kan**, C.C. Yang*,**,*** and Chun-Lei Yang**
ABSTRACT
This article offers experimental evidence to examine an important case in politics
where a monopolistic proposer seeks a majority’s consent from competitive
responders to split the gain. The unique subgame perfect equilibrium prediction
is that the side of trade with a monopoly will exploit the side of trade with com-
petition to reap almost all of the gain. Our experimental evidence reveals that
while responders do compete with each other to race to the bottom (consistent
with the prediction), the monopolistic proposer settles down to offer a ‘fair’
share of the pie to those from whom he or she seeks majority support (contrary
to the prediction).
II
NTRODUCTION
How to divide the gain from trade or cooperation is a common problem that
people encounter in their daily life. Human beings have developed many insti-
tutions to deal with this problem. According to North (1990, p. 3), ‘Institu-
tions are the rules of the game in a society or, more formally, are the
humanly devised constraints that shape human interaction’. In various circum-
stances, the outcome of the division of the gain largely relies on the rules or
institutions.
For concreteness, let us consider the division of the gain between a monop-
olist on one side and several competitors on the other side. Economic reason-
ing predicts that ‘Bertrand’ competition between competitors will drive them
to race to the bottom and, as a result, it will enable the monopolist to reap
almost all of the gain and leave little to competitors. This prediction has lar-
gely been borne out by Roth et al. (1991), G€
uth et al. (1997), Grosskopf
(2003), and Fischbacher et al. (2009), which experimentally contrast the ‘ulti-
matum game’ (UG) with the ‘ultimatum game with competition’ (UG-C).
The institutions or rules of UG are as follows: (1) a fixed gain is divided
between one proposer and one responder, (2) the proposer makes a proposal
to split the gain with the responder, and (3) the responder either rejects the
*National Chengchi University
**Academia Sinica
***Feng Chia University
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12084, Vol. 62, No. 5, November 2015
©2015 Scottish Economic Society.
546
proposal so that both players receive nothing and remain at their respective
status quos, or accepts the proposal so that it is implemented.
1
The rules of
UG-C are identical to those of UG, except for the introduction of competi-
tion: either several proposers simultaneously and independently make propos-
als to a monopolistic responder or several responders simultaneously and
independently decide whether to accept or reject the proposal made by a
monopolistic proposer.
2
All of the papers mentioned above find that regardless of whether it is pres-
ent or absent, competition exerts a dramatic impact on experimental out-
comes. In the case where competition is absent, the proposer often offers an
average of about 40% of the total amount to the responder. However, once
competition is present, the monopolist receives most and even almost all of
the gain, as economic theory predicts.
Ultimatum game constitutes the last round of the finite-horizon version of
the renowned bilateral bargaining
a la Rubinstein (1982). A natural counter-
part of UG in politics is the so-called ‘majoritarian ultimatum game’ (MUG),
which constitutes the last round of the finite-horizon version of the majority
bargaining developed by Baron and Ferejohn (1989). As emphasized by Baron
and Ferejohn, a fundamental question in politics concerns how to divide the
gain among members who have differing and sometimes conflicting prefer-
ences.
3
The institutions or rules of MUG are as follows: (1) a fixed gain is divided
between one proposer and several responders, (2) the proposer seeks a major-
ity’s consent to split the gain among the players, (3) the responders decide
whether to accept or reject the proposer’s proposed split, and (4) the proposal
is adopted if it wins the support of a majority and is defeated otherwise; when
defeated, the status quo allocation will be implemented.
Diermeier and Gailmard (2006) and Hsu et al. (2008) have conducted
experiments on MUG where players’ status quos are exogenously given. In
Diermeier and Gailmard (2006) the proposer’s status quo varies across treat-
ments but the two responders’ status quos largely remain the same. With self-
interested players, the theory predicts that all the treatments have the same
equilibrium in which the proposer should offer the responder with the lower
status quo his or her assigned status quo and grasp the rest of the pie regard-
less of the proposer’s assigned status quo. Their findings indicate the impor-
tance of entitlements –subjects seem to consider the assigned status quos as
determining an entitlement and are willing to accept a lower offer if the pro-
poser’s assigned status quo is high. Differing from the setting in Diermeier
and Gailmard’s (2006) experiment where only positive-sum games are consid-
1
For a literature survey on UG, see Camerer (2003).
2
UG-C is related to, say, a number of sellers who compete for the right to supply a single
item, or a number of buyers who compete to bid for an indivisible object owned by a seller.
Frequently used auctions such as the English, the Dutch, and the first-price sealed-bid auc-
tions are concrete examples of UG-C.
3
The Baron-Ferejohn model has become the workhorse for the study of a variety of issues
in political economics; see, for example, Persson and Tabellini (2000).
DIVIDING GAINS THROUGH POLITICS 547
Scottish Journal of Political Economy
©2015 Scottish Economic Society
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