Expectations matter in bottom-line setting: Theory and evidence

• Published in: Journal of economic behavior & organization Vol. 231; p. 106944
• Main Authors: Chen, Peikun, Li, Jianbiao, Pan, Jingjing, Zhu, Chengkang
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.03.2025
• Subjects: Bounded rationality; Expectation; Minimum acceptable offer; Strategy method; Minimum acceptable offer; Strategy method; D01; C91; Expectation; D91; Bounded rationality
• ISSN: 0167-2681
• DOI: 10.1016/j.jebo.2025.106944

•We find responders’ expectations for proposers’ offers have a causal influence on their minimum acceptable offers (MAOs) in bilateral ultimatum games.•Our research demonstrates that bounded rationality is the underlying mechanism driving the causal impact of responders’ expectations on their MAOs.•Our findings underscore the significant role of expectations in shaping decisions derived using the strategy method, in contrast to those derived using the direct response method. The bottom-line, or minimum acceptable offer (MAO), is a crucial concept in real-world economic negotiations. This study demonstrated a causal relationship between responders’ expectations of proposers’ offer and their MAOs setting, in a controlled ultimatum game. We develop three theoretical models (reference dependence, frustration aversion and bounded rationality) to further investigate the underlying mechanism. By considering two distinct scenarios - responders setting MAOs before and after knowing the proposer's offer - we generate distinguishable predictions from our models. We then conduct two experiments to test these predictions, exogenously manipulating subjects’ offer expectations and comparing the observed shifts in MAOs to our theoretical predictions. Our findings indicate that bounded rationality significantly contributes to the causal effect of responders’ expectations on their MAOs, providing a new perspective on how expectations shape bargaining behavior. Furthermore, our results help reconcile divergent findings under the strategy method and direct-response method, highlighting the effects of expectations as a key driver alongside emotion.