Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 7 Topics for Further Study
Chapter 22 of 36 Frontiers of Microeconomics
Section 15 of 18
…
Another human behavior insight is shown with the ultimatum game.
In the ultimatum game two volunteers who are strangers are told they are going to play a game and could win a total of $100.
The game begins with a coin toss to designate player A and B.
Player A then must propose a division of the $100 prize between the two.
After player A makes his proposal, player B accepts or rejects it.
If player B accepts player A’s proposal, both players are paid as proposed by A.
If player B rejects, both players get nothing.
Either way, the game ends.
…
Economic theory assumes people are rational wealth-maximizers.
This assumption leads to this prediction:
· player A should propose he gets $99 and player B gets $1
· player B should accept the proposal
· player B is better off accepting since he gets something
Because player A knows accepting this $99/$1 proposal is in player B's interest player A has no reason to offer player B more than $1.
Yet when people play the ultimatum game, the results differ from this prediction.
Player B usually rejects proposals that give only $1.
Anticipating this rejection, player A usually proposes giving player B much more than $1.
Some people will offer a 50-50 split.
It is more common for player A to propose giving player B $30 or $40 with player A keeping the larger share.
In this case player B usually accepts the smaller share.
The natural interpretation is people are driven in part by some sense of fairness.
A 99-1 split seems so unfair player B rejects it, even to his/her own detriment.
A 70-30 split is still unfair, but not so unfair it induces player B not to accept some money.
…
Throughout our study of household and firm behavior the innate sense of fairness has not been considered.
The results of the ultimatum game suggest perhaps it should.
In previous chapters we covered how wages are determined by labor supply and labor demand.
Some economists have suggested the perceived fairness of what a firm pays workers also should be a factor.
Thus, when a firm has an especially busy and profitable year workers, player B, may expect to be paid a fair share of the prize even if the equilibrium does not require it.
In this case the firm, player A, even though not economically required to commonly pays bonuses to workers due to a sense of fairness.
… …

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