Lecture 2 - Part III

Question 1

How do we define altruism?

Answer 1

If the first partial derivatives of an individual’s utility functions w.r.t payoff of others are strictly positive

Question 2

What is the Fehr-Schmidt model of Inequity Aversion?

Answer 2

An individuals utility depends on his own payoff, a guilt function and envy function.

Question 3

What are the parameters of the Fehr-Schmidt Model?

Answer 3

1. The coefficient for guilt is between 0 and 1
2. The coefficient for envy is greater than guilt

Question 4

What is the function in the Fehr Schmidt Model?

Answer 4

U = xi - (a/ n-1)sum of differences between other payoffs and your own - (b/ n-1) sum of differences between your payoff and other payoffs

Question 5

How do we solve for the solution to the ultimatum game?

Answer 5

1. Normalize the pie to 1
2. We define player 1’s actions as (taking >=0.5) vs (taking <0.5)
3. We solve for player 2’s best response to player 1
4. We solve for player 1’s optimal actions

Question 6

What are the assumptions of the Fehr-Schmidt Model?

Answer 6

1. The population is heterogenous in alpha and beta
2. The population knows each other’s alpha and beta

Question 7

What are the predictions for the ultimatum game?

Answer 7

1. Proposers make offers keeping at least half the pie
2. Responders reject low offers

Question 8

What are the results for the egalitarianism experiment?

Answer 8

1. More egalitarian choices are made as age increases
2. The sharing game has the lowest percentage of egalitarian choices made (1,1) vs (2,0)