My friend’s friend has a problem — workers in his small factory are threatening to go on strike due to disagreement on salary hike. A strike would be lose-lose situation, as the firm will lose revenue during the strike period and workers will not get their salary, leave alone the hike. So, why then were the workers threatening to strike?

Experimental economics provides an answer to this question. Consider the Ultimatum Game. In the original version of this game, one subject was given, say, Rs 100 and was asked to share the money with her pair, another subject. Let us call the former, the Giver and the latter, the Acceptor.

If the Acceptor accepts the Giver’s offer, both keep their share. So, if the Giver offers Rs 10, the Acceptor keeps Rs 10 and the Giver, Rs 90. If, however, the Acceptor rejects the offer, both go home empty-handed.

The results of the experiment showed that Givers’ were willing to offer close to 50 per cent. One reason would be the fear of rejection by the Acceptors; for then, both parties get nothing.

A different version called the Dictator Game was, hence, tested. In this game, a Giver kept her booty even if the Acceptor rejected the offer. Still, 76 per cent of the Givers’ chose to split evenly. Why? Economists argue that the existence of fairness is the reason for the even split. And this, perhaps, is the reason for the agitation at the factory.

A new product launch meant that the firm would push up profits. The factory workers wanted at least 10 per cent share of the profits while the owner was willing to part with only 5 per cent.

Classical economics argues that workers should accept the 5 per cent hike, as they are better off compared with no hike at all. That is called rational maximisation. The workers, however, are driven more by a sense of fairness than by rationality. They are, hence, likely to reject the offer and strike even though it is self-defeating.

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