Social Preferences in Dictator and Ultimatum Games Flashcards
What does it mean if an individual has social preferences?
Individuals behave as if they value the payoff of others positively or negatively
Where are social preferences relevant?
- Donations to charities
- Tipping waiters, delivery drivers
- Voluntary unpaid work
How do economists study social preferences?
Through studies of games like
- dictator game
- ultimatum game
- Prisoner’s Dilemma Game
- Public Goods Game
What does standard economic theory predict player 1 does in the dictator game?
keep all the money
Player 1 has utilitarian preferences, what does their utility function look like?
U1 (x, y) = square root of x + square root of y.
Player 1’s utility increasing in both Player 1’s and Player 2’s attainment.
The utility maximizing choice for Player 1 is to split the money equally.
Player 1’s preference exhibit envy
U1 (x, y) = square root x minus square root y.
Player 1’s utility goes down when player 2’s attainment goes up. The utility maximizing choice for Player 1 is to keep all the money to oneself.
Player 1 has a disutility from player 2 getting anything
Player 1 has altruistic preferences
U1 (x, y) = 3/5 square root x + 2/5 square root y
- Player 1’s utility is increasing in both Player 1’s and Player 2’s attainment.
- Given the weight - Player 1 puts on own and other’s payoffs, the utility maximizing choice for Player 1 is to keep EUR 7 for herself and to give EUR 3 to Player 2
- Player 1 wants to keep inequality to a minimum - keep preference to as close as possible to Player 2’s preference: which leads to a fair split
Player 1 has Rawlsian preferences
U1 (x, y) = min (square root x, square root y)
- Player 1 tries to maximize utility associated with the allocation.
- The utility maximizing choice for Player 1 is to choose a fair split of 5 euro for each Player
Player 1 has Inequality averse preferences
U1 (x, y) = -|square root x - square root y|
- Player 1 tries to minimize difference between the two players’ utilities.
- The utility maximizing choice for Player 1 is to choose a fair split of 5 euro for each player
What can be taken away from the dictator game?
- We can reject the hypothesis that all individuals are selfish
- we also can reject the hypothesis that all individuals split endowment 50/50
Which three social preferences are inequality averse?
Utilitarians, Rawlsians, and Altruists
What is a strategic game?
(=Normal-form): Each player chooses her plan of action once and for all; All players decisions are made simultaneously (e.g. Prisoners’ Dilemma)
What is an extensive game?
Specifies possible orders of events; Each player considers plan of action throughout game (not only at the beginning of the game but also) whenever she has to make a decision; we will assume that players are perfectly informed of the others’ moves when they have to make a decision (e.g. Ultimatum game)
What is an ultimatum game?
It is an abstraction of (one-shot) negotiation/bargaining
Player 1 is the Proposer, Player 2 is the Responder
Player 1 has a fixed amount of money (say $10) and can offer some fraction to Player 2 ($0 and $10)
- If player 2 accepts, they split the money as proposed
- If player 2 rejects, both get 0
What is subgame perfect Nash equilibrium?
A strategy profile that constitutes a Nash Equilibrium in every subgame
- it is found by backward induction
