The Ultimatum Game in rich societies

Introductory economics students who are not exposed to CORE materials will be ill-equipped to understand popular uprisings involving large numbers of young people in wealthy countries such as France. Traditional textbooks offer little to help explain why hundreds of thousands of people take to the streets, sometimes with a minority engaging in violence, citing economic grievances as the source of their discontent. These uprisings not only have economic causes but also very serious economic and political consequences. They can aggravate economic crises and, as an unintended consequence, potentially help the far right win a presidential election, thereby exacerbating a vicious circle with very harmful effects on economic welfare and equality. One would expect such important economic events in our contemporary world to be covered extensively in what may be the only economics course students ever take, especially when some of these students may be participating in the events.

Instead, the free textbook The Economy, published by CORE, introduces students from the very first term to theoretical games and empirical experiments that illustrate precisely how such uprisings can emerge. Of course, these revolts involving young people do not occur only in very wealthy countries such as France. They have also taken place in Italy, Albania, and India, as well as in Chile in 2019 and during the Arab Spring. Yet most of these societies are not desperately poor on average. Many people take to the streets at considerable risk to themselves, potentially losing everything, or at least a great deal of what they have, including their freedom.

One of the conceptual frameworks that The Economy uses to explain these mobilizations is the Ultimatum Game. In this two-player game, the first player proposes how to divide an asset (think of a country's wealth or income), and the second player decides whether to accept or reject the offer. If the second player rejects it (think of an uprising or a civil war), the asset disappears—or is destroyed—and nothing remains to be shared. Under the assumption of individual self-interest and rationality, the second player should accept any offer, however small, since rejecting it would leave them with nothing. However, experiments involving real people consistently show that second players reject many offers when the proposed division is perceived as unfair, particularly when it deviates substantially from an approximately equal split. The explanation is that people tend to reject unfair offers because they feel outraged by the injustice, even when doing so comes at a considerable cost to themselves and to the proposer.

Like all models, the Ultimatum Game is a simplification, and reality is much more complex. Nevertheless, it provides a useful conceptual framework for understanding why people may be willing to risk so much when confronted with situations they perceive as unfair.

In his memoir, Mario Marcel, the former governor of the Central Bank of Chile and former finance minister, offers his informed perspective on the 2019 social uprising in his country ("estallido social"). Conventional analysts struggled to explain the revolt, which involved considerable violence, because Chile was supposed to be a model of “sound” economic policies and institutions. Yet Chile remained a highly unequal country in the world's most unequal region, Latin America. Marcel, who was then governor of the Central Bank, explains the revolt in terms of the expectations and feelings of many young Chileans. I find his analysis closely aligned with the explanation that many experts offer for how ordinary men and women respond to experimental proposals in the Ultimatum Game.