Implementing equal division with an ultimatum threat

Esat Doruk Cetemen and Emin Karagözoğlu

Theory and Decision, 2014, vol. 77, issue 2, 223-236

Abstract: We modify the payment rule of the standard divide the dollar (DD) game by introducing a second stage and thereby resolve the multiplicity problem and implement equal division of the dollar in equilibrium. In the standard DD game, if the sum of players’ demands is less than or equal to a dollar, each player receives what he demanded; if the sum of demands is greater than a dollar, all players receive zero. We modify this second part, which involves a harsh punishment. In the modified game $$(D\!D^{\prime })$$ ( D D ′ ) , if the demands are incompatible, then players have one more chance. In particular, they play an ultimatum game to avoid the excess. In the two-player version of this game, there is a unique subgame perfect Nash equilibrium in which players demand (and receive) an equal share of the dollar. We also provide an $$n$$ n -player extension of our mechanism. Finally, the mechanism we propose eliminates not only all pure strategy equilibria involving unequal divisions of the dollar, but also all equilibria where players mix over different demands in the first stage. Copyright Springer Science+Business Media New York 2014

Keywords: Arbitration; Divide the dollar game; Equal division; Implementation; Subgame perfect Nash equilibrium; Ultimatum game (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (8)

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DOI: 10.1007/s11238-013-9394-z

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