Alternative equilibria in two-period ultimatum bargaining with envy

Abstract

A two-period ultimatum bargaining game is developed in which parties experience an envy-type externality coming from the surplus captured by their counterparts. Our assumptions on envy levels and outside opportunities allow us to characterize a richer set of bargaining outcomes than that identified by the prior literature, which includes a novel agreement equilibrium which we label Type I agreement. As this novel agreement solution is delivered by a negotiation resembling a one-shot ultimatum game, only characteristics of the second-moving player shape the sources of bargaining power. This property contrasts with that of Type II agreement—an agreement solution previously reported by related literature—in which characteristics of both players influence negotiating strengths. Numerical simulations are performed to illustrate the interplay between envy, impatience rates and outside opportunities as well as the degree of inequity generated by each agreement type.