Strategy and Equity: An ERC-Analysis of the Güth-van Damme Game

Güth and van Damme's three-person bargaining experiment challenges conventional thinking about how self-interest, as well as fairness, influences behavior. Among other things, the experiment demonstrates that people care about receiving their own fair share, but care far less about how the remainder is divided among the other bargainers. The ERC model posits that, along with pecuniary gain, people are motivated by their own relative payoff standing. Beyond this, ERC employs standard game theoretic concepts. We describe the general ERC model, and show that it predicts many of the key phenomena observed in the experiment. Copyright 1998 Academic Press.