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
What is player 2’s best response in each subgame? - Utilitarian preferences in the Ultimatum game
Player 2’s response in each subgame is to Accept, as regardless what the exact allocation proposed by Player 1 is if Player 2 accepts at least one Player gets a positive monetary payoff
Note: they derive the same utility from the other’s monetary payoff as from their own
What is Player 1’s best response considering what he expects Player 2 to do when his turn comes? - Utilitarian preferences in the Ultimatum game
If Player 1 knows Player 2’s utility function, he knows that Player 2 will accept any allocation. Player 2 will accept any allocation. Player 1 considers his own utility from all possible allocations (knowing that Player 2 accepts). Player derives the highest possible utility from an equal (5,5) split
SPNE: Player 1 offers $5 to Player 2. Player 2 accepts all offers.
What were the findings from behavioural experiments in 15 small scale societies?
model of individuals caring about own payoff only is rejected in all of these societies
What do comparisons across societies show?
- Individuals’ social and economic environments shape behaviours.
- Difference in behaviour seem to be better explained by difference in economic and social environments than by individual characteristics such as age, sex, etc.
Does economic analysis assume exogenously given (fixed) preferences or endogenous (depend on environment) - why is comparisons across societies important?
Economic analysis assumes exogenously given (fixed) preferences
- However, such studies show preferences are endogenous - depend on the environment
What does ultimatum game with restricted proposals show
Intentions matter
Comparing Proposer behaviour in Ultimatum and Dictator games
Proposers’ mean offer in Ultimatum games is higher than in Dictator games, suggesting threat of rejection by Responder plays a role (altruism only unlikely to explain Proposers’ behaviour)
What motivates Responders to reject (small) positive offers?
In one-shot games: rejection of positive offers not compatible with assumption of maximising own payoff & also not compatible with altruism.
Possible interpretation: Responder dislikes being treated unfairly, emotional reaction, inequality aversion
Player 2 (Responder) with utilitarian preference will accept/reject any allocation?
accept any allocation
