Inefficiency and Social Exclusion in a Coalition Formation Game: Experimental Evidence

This paper reports the results of experiments involving a 3-personcoalitionformation game with an ultimatumbargaining character. The grand coalition was always the efficientcoalition,whereas the values of the 2-personcoalitions are varied such that they lead to an efficiency loss inthe range of6.7 up to 30 percent. Furthermore, the 2-person coalition implies social exclusion, since the not chosenmember alwaysreceives a payoff of zero. Consistentwith results reported in the literature on 2-person ultimatumbargainingexperiments, negative reciprocity (i.e.punishment of unfair offers) plays a crucial role in decision making.Thehypothesis that selfishness and anticipatednegative reciprocity by proposers together with actual negativereciprocalbehavior of responders lead to inefficientoutcomes and social exclusion is strongly supported by the data. Itturns outthat a huge majority of proposers choosethe inefficient and unfair 2-person coalition. Proposer inducedefficiencylosses vary between 5 and 20 percent, and onesixth to almost one third of the population is excluded fromparticipation.