From Ultimatum to Nash Bargaining: Theory and Experimental Evidence

Abstract

We examine theoretically and experimentally the strategic behavior of first and second movers in a two party bargaining game with uncertain information transmission. When the first mover states her demand, she does not know whether the second mover will be informed about it. If the second mover is informed, she can either accept or reject the offer, and payoffs are determined as in the ultimatum game. If she is not informed, the second mover states her own demand, and payoffs are determined as in the Nash demand game. In the experiment, we vary the commonly known probability of information transmission. Our main finding is that first movers' and uninformed second movers' behavior is qualitatively in line with the game theoretic solution, that is, first movers' (uninformed second movers') demands are lower (higher) the lower the probability of a signal.

Keywords: Commitment, imperfect observability, ultimatum bargaining game, Nash bargaining game, experiments

JEL Classification: C72, C78, C92