Two-Person Cooperative Games with delta-Rationality

TL;DR

This paper introduces a model for two-person cooperative games where payoffs are split into rational and distortion parts, emphasizing the total payoff for behavior prediction and the rational part for welfare analysis, exemplified through the Nash demand game.

Contribution

It proposes a novel payoff model separating rational and distortion components, enhancing understanding of player behavior and welfare analysis in cooperative games.

Findings

Total payoff guides behavior prediction

Rational payoff aids welfare analysis

Illustrated with Nash demand game example

Abstract

A player's payoff is modeled as consisting of two parts: a rational-value part and a distortion-value part. It is argued that the (total) payoff function should be used to explain and predict the behaviors of the players, while the rational value function should be used to conduct welfare analysis of the final outcome. We use the Nash demand game to illustrate our model.