5. Social Preferences

Question 1

What was the frequent economic assumption about selfishness?

Answer 1

People are homo economicus- act with only interest for themselves

Question 2

Can the uncoordinated pursuit of self interest lead to socially optimal outputs?

Answer 2

• Adam Smith “it isn’t from the benevolence of the butcher, brewer or bakers that we expect our dinner, but from their regard to their own self interest”
• ”If there are no externalities, equilibrium allocations will be optimal”

Question 3

What did Vernon Smith find when conducting an experimental test of competitive market theory?

Answer 3

The lab outcomes are consistent with textbook supply and demand model predictions. No cultural differences, self interested strive to get a good deal equilibrates markets

Question 4

What is true of social preferences in competitive markets?

Answer 4

Preferences don’t seem to matter because contracts are complete so there are no externalities, all costs and benefits are internalised

Question 5

Social preferences definition

Answer 5

To what extent do people have preferences that involve the well being and matters of others

Question 6

Altruism

Answer 6

The unconditional willingness to benefit someone else

Question 7

Positive reciprocity

Answer 7

Responding to kindness with kindness

Question 8

Negative reciprocity

Answer 8

Responding to unkindness with unkindness

Question 9

What is the dictator game used for?

Answer 9

As a tool to measure altruism

Question 10

Describe the dictator game

Answer 10

• you have £10 to split between you and someone else

* the other person has to accept whatever you give them

Question 11

Results of dictator game

Answer 11

•27% of people give nothing 
•42% give £5
•if we know the other person we give more money 
•old people give more
•western societies are more selfish 
•

Question 12

Describe the rules of the trust game

Answer 12

• you can transfer £0-10 to someone else
• when you send it, it’s tripled in value
• the other person can send back as much as they want
• how much do you send?

Question 13

Results of trust game

Answer 13

Meta analysis found the mean sent was £5 and mean returned was £3.70. Evidence of positive reciprocity

Question 14

Describe how wages are correlated to effort in principal and agent problem

Answer 14

• theory suggests effort should be independent of wage

* however people work harder when given a higher wage since they show positive reciprocity

Question 15

Public goods game rules

Answer 15

• you have £20 to split between a private account and group account of 4 people
• every pound entered into the group account gives each person 50p
• how many pounds do you put into the group project?

Question 16

Results of public goods game

Answer 16

Split results some people give nothing and some people give everything

Question 17

Rules of the ultimatum game

Answer 17

• p1 gives p2 a share of £10
• p2 can accept or reject the offer
• if p2 rejects they both get zero

Question 18

Prediction of ultimatum game under traditional economic theory

Answer 18

•p1 gives p2 £1 and p2 accepts

Question 19

Results of ultimatum game

Answer 19

• Giving £5 is most common answer and people reject “unfair” offers below £5- negative reciprocity
• people offer higher offers than in dictator game
• people also reject “hyperfair offers”

Question 20

How do the results of the public good game change when playing with partners and punishment

Answer 20

Gradually players start to put all their money in

Question 21

What is the theory of social preferences by Fehr and Schmidt 1999?

Answer 21

People care for their own material but many people also dislike inequality
•aversion to disadvantageous inequality towards another person
•aversion to advantageous inequality towards another person