“Gain and Loss Ultimatums”
Coauthor(s): Nancy Buchan, Rachel Croson, George Wu.
Editors: John Morgan
This chapter investigates the difference between ultimatum games over gains and over losses. Although previous research in decision making has found that individuals treat losses and gains differently, losses have not previously been investigated in strategic situations. In the field, however, the problem of negotiating over losses is as unavoidable and problematic as the problem of negotiating over gains. In addition, data on how we bargain over losses can shed some theoretical light on fairness preferences. Two experiments use within-subject designs, the first in the U.S. and the second in the U.S., China and Japan. We find that offers and demands are higher in losses than in gains, and that these results hold across the three countries. We adapt Bolton's (1991) model of fairness to explain the results. Specifically, we extend prospect theory's loss aversion to unfairness, suggesting that unfairness in losses looms larger than unfairness in gains.
Source: Advances in Applied Microeconomics, Volume 13: Experimental and Behavioral Economics
Buchan, Nancy, Rachel Croson, Eric Johnson, and George Wu. "Gain and Loss Ultimatums." In Advances in Applied Microeconomics, Volume 13: Experimental and Behavioral Economics, 1-24. Ed. John Morgan. Amsterdam: Elsevier, 2005.