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If You Can Only Keep a Cash Gift By Sharing It, How Much Do You Give?

Imagine getting $400 on one condition: You must give some of the money away. What percentage would you give?

Now consider this scenario: If the recipient refuses your offer, neither of you gets any money. To avoid being rejected, wouldn’t you offer more than in the first case, where your decision was unilateral?

Economists use these scenarios to learn about human behavior in negotiations. The first situation, where the cash-holder has all the power, is called the dictator’s game. The second situation, where the beneficiary can nix the deal for both parties, is called the ultimatum game.

A new study on the ultimatum game looked at why those dispensing the money – known as proposers – often give more than what’s needed to ensure acceptance. The research, published in the Economics Letters journal, was done by Professor Natalia Candelo (Queens College), along with colleagues from Texas A&M University and the University of Arizona.

The study was conducted in 11 low-income villages in Mexico. Individuals were given 400 Mexican pesos (about $38 U.S., or two days’ wages), with nine options for how to divvy it up. The study found that average offers ranged from giving away just over a third of the cash, to giving away nearly half of it.

Researchers also tracked rejection rates in each village. They wanted to figure out what split allowed givers to maximize their own take while still ensuring that the offer would be accepted in their village, a point known as the income maximizing offer, or IMO. (Previous research has shown that proposers in an ultimatum game usually know how much to offer so that they can keep as much as possible, while still getting the deal accepted. After all, if you were told to divvy up $400, you’d have a pretty good sense of how much to offer your neighbors to avoid their scorn.)  

Perhaps surprisingly, though, the study found that offers significantly exceeded the income maximizing offer in nine out of the 11 villages. In one village, proposers offered nearly twice the IMO. But why?

After the ultimatum game was completed, researchers used the dictator game to measure altruistic preferences, and held a lottery to measure risk preferences. They also surveyed participants’ beliefs about the demand for fairness.  They concluded that risk aversion – padding offers out of fear of rejection – was not a significant factor. Instead, proposers who offered more than they needed to were acting either out of altruism, or because they decided to give away the amount they would have considered acceptable had they been on the receiving end. In other words, the givers used “their own preferences in forming beliefs about the behavior of others.” This misperception of reality is usually called the false consensus effect, a phenomenon in which people tend to overestimate how common their own views are.

Beyond SUM

Work By

Natalia Candelo (Assistant Professor, Economics) | Profile 1 | Profile 2

Colleges and Schools

Queens College

Bonus Content

"What's the ultimatum game? " (HowStuffWorks.com)