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Consider that player A is endowed with $10 and player B is endowed with $0. Player A has two options: Option 1, sharing $2 with player B; Option 2, sharing $0 with player B.
1. What is the prediction of the inequity aversion model (Lecture 5)? Show this theoretically. Consider that player A is endowed with $10, player B is endowed with $0, and player C is endowed with $0. Player A has three options: Option 1, sharing $2 with player B; Option 2, sharing $2 with player C; Option 3, coin toss (if Head, sharing $2 with player B, if Tail, sharing $2 with player C). Player A prefers Option 3 to both Option 1 and Option 2.
2. Besides choice difficulty discussed in this paper, propose an alternative behavioral explanation underlying this behavior?
3. Can expected utility explain this behavior? Can inequity aversion model explain this behavior? Can combination of expected utility and inequity aversion model explain this behavior? Show these theoretically.
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