Consider the Dictator Game a twoplayer game often played in

Consider the Dictator Game, a two-player game often played in experimental economics labs. In the Dictator game, one player (the Dictator) is given an amount of money and then instructed to give some arbitrary portion of it to an anonymous second player. The second player must accept whatever the first player offers, if anything.

a) According to traditional economic theory, what should the first player offer the second?

b) In experimental settings, the average offer given to the second player is about 30% of the initial amount. Explain how such an offer might not be motivated by an innate sense of

fairness.

Solution

a) According to traditional economic theory, he should offer 50% so that both can be equally better off and it can lead to a nash equilibrium.

Bundle can be (50,50) if 1 player has suppose 100 so he gives away half of the amount.

b) It is violated on the grounds of fairness as he could have given half of the amt but he gives only 30% adopting a dominant strategy and keeping more with himself.