Inequality Aversion and Efficiency with Ordinal and Cardinal Social Preferences – An Experimental Study

In this paper, we report on a series of free-form bargaining experiments in which two players have to distribute four indivisible goods among themselves. In one treatment, players are informed about the monetary payoffs associated with each bundle of goods; in a second treatment only the ordinal ranking of the bundles is given. We find that in both cases, inequality aversion plays a prominent role. In the ordinal treatment, individuals apparently use the ranks in the respective preference orderings over bundles of goods as a substitute for the unknown monetary value. Allocations that distribute the value (money or ranks, respectively) most equally serve as natural "reference points" for the bargaining processes. Frequently, such "equal split" allocations are chosen by our subjects even though they are Pareto dominated. Whether a Pareto optimal allocation is chosen or not depends on whether or not it is a Pareto improvement relative to the "equal split" reference allocation. We find less Pareto-damaging behavior due to inequality aversion in the ordinal than in the cardinal treatment.