This lecture solves the simplest version of the ultimatum game. We find that those who can propose offers hold substantial bargaining leverage over their opponents.
- If a single person makes a take-it-or-leave-it offer, he has no incentive to give a large share of the surplus to his partner.
- This is because the receiver of the offer can only accept or reject. Since rejecting terminates negotiations without an agreement, she is better off accepting a deal even if it is only slightly more attractive than bargaining breakdown.
- We solve games by starting at the end and working our way to the beginning. We call this process backward induction.