Playing Unfair: Punishment in Bargaining and Negotiations Deborah Kay Elms IPES Conference November 14, 2008

Punishing Unfairness People respond to unfair play Rarely reward fairness, but frequently will punish unfair behavior Will leave gains on the table Signals of “kindness” determine what sort of “game” we are playing Not predicted by economic theory Evidence drawn from laboratory

Some Caveats Process not outcomes Not just rhetoric Not reciprocity (emotional component) Evolution and brain chemistry Not cooperation Fairness does make cooperation more likely But will defect and punish unfairness even if it imposes personal costs Not altruism (unconditional kindness)

Playing Fair in the Lab: Ultimatum Games Economists suggest 99/1 split of dollar Player #2 rejects nearly all 80/20 splits Typically hovers around 50/50 Generous even if original offer stands Even in one-shot anonymous games Even at high stakes Even in alternate settings Will be nice to nice players and punish unfair offers

Fairness Alters Payoffs Payoffs in PD are altered [Cooperate, cooperate] and [defect, defect] are fairness equilibria “Cheap talk” critical Determines kindness of players Framing matters “Wall Street” vs. “Community Game” Reversals in Chicken Game [Chicken, chicken] or [Dare, dare]

Role of Intentions “Accidental” kindness not rewarded Options matter If Player #1 in UG not allowed to select any but [8,2] or [2,8] -- not unfairness But if [5,5] possible and not offered, will punish Punishment (negative retaliation) often appears excessive Chimpanzees do not reward fairness Intentions make a difference

Fairness in Real World Settings: Agriculture Uruguay Round -- excessive concessions Doha Round all about “development” Different expectations at outset Rich world subsidies for cotton serve as fairness signal of kindness Avoid new Agreement on Agriculture (AOA) “unfair” deal EU/African-Caribbean-Pacific (ACP) deals over new economic partnership agreements (EPA)