What Is an Endowment Game in Behavioral Economics?

An endowment game is a concept in experimental economics and behavioral science that studies human decision-making. These experimental setups create controlled environments where participants make choices concerning an initial allocation of resources, known as the “endowment.” The games observe how individuals behave when faced with decisions about sharing, contributing, or keeping resources, providing insights into cooperation, fairness, altruism, and strategic resource allocation.

Fundamental Elements

Central to endowment games is the “endowment” itself, an initial, predetermined allocation of resources given to participants. This allocation often takes the form of money or points, serving as the starting capital players use to make decisions.

Participants are known as “players,” and their roles are defined by the game’s rules. Each player makes choices regarding their endowment, typically determining how much to keep, share with others, or contribute to a common pool.

The final “payoffs” or “outcomes” are determined by the collective decisions of all players. For instance, a player’s payoff might be their remaining private endowment plus any share received from a common fund or other players. The design of these payoffs incentivizes certain behaviors and allows researchers to analyze how individuals balance self-interest with fairness or cooperation.

Typical Game Structure

A standard endowment game unfolds through a sequence of events. It begins with the distribution of resources, where each participant receives their initial endowment.

Once endowments are distributed, the decision-making phase begins. One or more players make choices that affect others, such as a first player deciding how much of their endowment to transfer to a second player.

Subsequently, other players react to initial decisions, making their own choices. The game concludes with the calculation of final payoffs, determined by each player’s initial endowment, their own decisions, and the decisions of other participants.

Common Applications

Endowment games are widely applied in experimental economics to illuminate specific aspects of human behavior. They create scenarios that test hypotheses about cooperation, fairness, and altruism.

Public Goods Game

One prominent example is the Public Goods Game, which explores individuals’ willingness to contribute to a collective benefit. In this game, each player receives an endowment and then decides how much of it to contribute to a common pool, while keeping the rest for themselves. The total contributions to the common pool are typically multiplied by a factor greater than one, and the resulting sum is then distributed equally among all players, regardless of their individual contributions. This structure creates a tension between individual self-interest, where keeping the entire endowment is the most profitable strategy for an individual, and collective welfare, where universal contribution maximizes group gains. The Public Goods Game reveals insights into the dynamics of cooperation and the tendency for “free-riding,” where individuals benefit from others’ contributions without contributing themselves.

Ultimatum Game

The Ultimatum Game is another widely used endowment game that investigates fairness and strategic bargaining. In this two-player game, one player, the “proposer,” is given an endowment, usually a sum of money, and proposes how to divide it with a second player, the “responder”. The responder can either accept or reject the proposed division; if accepted, the money is split as proposed, but if rejected, neither player receives anything. Traditional economic theory might suggest the proposer offers the smallest possible amount and the responder accepts any non-zero offer, but experimental results often show proposers offering between 30-50% of the endowment and responders rejecting offers below 20%. This behavior demonstrates that considerations of fairness and the fear of rejection significantly influence strategic decisions in bargaining situations.

Dictator Game

The Dictator Game, a simplified variation of the Ultimatum Game, focuses specifically on altruism and generosity in the absence of strategic considerations. Here, one player, the “dictator,” receives an endowment and decides how much of it to give to a second, passive player, the “recipient”. The recipient has no recourse and must accept whatever amount the dictator chooses to give, even if it is zero. Unlike the Ultimatum Game, there is no threat of rejection to influence the dictator’s decision. Despite the ability to keep the entire endowment without consequence, many dictators choose to share a portion, often around 20-30% of the endowment, suggesting that factors like fairness and altruism play a role in economic decision-making. This game helps researchers understand unreciprocated giving and the motivations behind charitable behavior.