6. Self Interest Hypothesis Flashcards
What did Stigler say about self interest and ethical values
“When self interest and ethical values with wide verbal allegiance are in conflict, most of the time self interest theory will win
Self interest hypothesis
People only maximise their own well being
General results of ultimatum game and results from which study are we shown?
-most people offer 50%
-acceptance rate increases as offer increases up until pretty much 100% acceptance when offered 50%.
-slight drop off in acceptance rate for offers over 50%
-Guth Et al 1982 newspaper experiment n=1035. Replicated by Gachter at Nottingham with economic students
What does the strategic fairness paper by Forsythe 1994 do and what do they find?
They compare offers in UG and DG. Offers are much lower in DG so there is a strategic incentive in the ultimatum game. Average offer UG=4.4, Avg offer DG=2.6
Give summary of results in Engel Et al 2011
Meta analysis of 129 studies on dictator games
36% give nothing
16.7% give half
5% give everything
All others are decreasing in likelihood as offer increases
2/3 don’t act in line with self interest hypothesis
Results of Berg Et al 1995
Trust game. People send money and the responder sends money back. This isn’t in line with self interested hypothesis
How does the gift exchange game work?
2 players: principal and agent
Stage 1: principal offers w>0
Stage 2: in case of acceptance, agent chooses effort e
Monetary payoffs
Principal =10e -w
Agent = w-c(e)
Results of public good game (Ledyard 1995)
People cooperate in one shot games but some free ride. Cooperation declined to low levels over time. Partners contribute more than strangers- strategic incentives matter
Results of public goods game with punishment (Fehr & Gaechter 2000)
With punishment, cooperation increases over time in both partners and strangers. Punishment levels in both partner and strangers are similar which indicates punishment is likely emotional rather than strategic
What are the two main theoretical approaches?
Outcome based models of social preferences: individuals care about own payoff and may also care about distribution of material gains between themselves and others
Models of reciprocity: individuals care about their own payoff and may also care about the intentions of others
What assumptions are needed for the Fehr- Schmidt model 1999?
Inequality per se or interpersonal inequity
Relevant reference group?
Relevant reference output?
Advantages vs disadvantaged payoff inequality?
What is self centered equity aversion?
Individuals only care about inequity between own and others payoff
What factors are likely to affect the relevant reference group?
Social context, social proximity among individuals etc.
In lab it is natural to assume the reference group is simply the set of subjects playing against each other
What did Loewenstein 1989 find?
He gave a utility function of player i where alpha measured the aversion against disadvantageous inequity and beta measured the aversion against advantageous inequity
We assume alpha> beta> 0
Beta<1
Which stylised facts about behaviour in the UG experiments died the FS model account for?
Proposers don’t make offers over 50%
Offers of 50% are always accepted
Low offers are likely to be rejected
Set up of Blanco, Engelmann, Norman 2011 in experiment to derive the joint distribution of alpha and beta
Subjects play all of UG, MDG, SPD, PGG. Subjects paid according to results in one randomly chosen game
Findings of Blanco, Engelmann, Norman 2011 in experiment to when finding the joint distribution of alpha and beta
-inequality aversion has predictive power at aggregate level but performs less well at individual level.
-while subjects might follow some notion of fairness across various games, this isn’t systematically captured by the inequality aversion parameters at the individual level
Achievements of the Fehr-Schmidt model
-FS explain several key phenomena observed in experiments
-FS is simple and tractable
-popular and hugely cited
Limits of inequity aversion
-Some model assumptions are driven by focus on individual behaviour in simply economic experiments.
-assumptions are less clear in other contexts or in field
-however, these caveats hold for many models that abstract from important real life features
Theoretically important limitations of the FS model
- Dictator game predictions and linearity assumption in the FS model.
- Cross game consistency of the FS model
- Equity vs efficiency/rawlsian- maximin preferences
- The role of intentions
How do Blanco, Engelmann, Normann estimate subjects alpha and beta?
UG used to estimate subjects alpha, MDG used to estimate subjects beta
Do inequality minimising actions arise because subjects care about inequity or social welfare?
Engelmann & Strobel 2004 use simple distributional games to disentangle inequity aversion, efficiency and maximin motives. One player decides allocation of money among herself and two other players. All 3 motives have seemingly similar levels
How is intentionality tested? And how does it matter?
Compare how human players respond to offers made by computers vs humans. People accept everything when offered it by a computer.
Falk, Fehr, Fischbacher 2003 test role of available yet unchosen alternatives focusing on rejection rate after 8/2 offer
How can reciprocity appear in Battle of sexes Rabin 1993
P1 might conclude that P2 is lowering her own payoff to hurt him so P1 may retaliate. P1’s payoff depends not only on actions but also on beliefs about P2’s motives
