Social preferences in the Field Flashcards
Why is trust and cheating important in economics?
- exchange relationships - principal agent problems, mis-selling especially with asymmetric information
- investment relationships - trust and incentives to invest
- trust - basis of any transaction not involving a complete contract specifying all possible outcomes
How is cheating circumscribed (condemned)?
- institutions = laws, social norms condemning lying
2. market pressures= reputation and commitment mechanisms e.g. warranties or money-back guarantees
Charness and Dufwenberg (2006)
Dictator Game
Experimental evidence that shows guilt-aversion:
Model:
1. The Truster (A) chooses to be In or Out
2. The Trustee (B) then chooses Roll (high effort) or Don’t (low effort), in which case the latter gives them a higher payoff (0,14) - 14 for B
3. if the Trustee chooses Roll, then they each get 10
4. Hidden action because their payoffs are not observed.
If strictly money-maximising, trustee will not return money to the truster and the truster knowing that will not invest.
B can make pre-game promises to A but if trictly money max. it will not be a credible promise (according to analytical game theory.
However: empirically findings suggest we do observe In, Roll. Why?
Guilt-aversion!!
Pre-play communication in the form of promises made - if B promises A that they will Roll and A believes that B will roll - second-order beliefs, B will feel guilty if doesn’t live up to A’s expectations.
Vanberg (2008)
Why do people keep their promises?
- Guilt-aversion: people dislike letting others down.
- Lying aversion: preference for keeping one’s word
To distinguish between the lying and guilt aversion: Two-stage mini dictator game with random dictatorship, where nature determines the dictator. opportunity to communicate pre game.
Independent variation in promises and second-order beliefs - random switching - facing recipients they do not know, and only dictators know if partners switched => dictators second-order beliefs should be independent of the decision to switch, because responders do not know.
Results:
If facing original, same partner, Roll is more likely but not a significant difference between the switch and no switch conditions
Suggesting people have a promise for keeping their promises independent of expectations.
Self-Control Depletion and Unethical behaviour
Can relate honesty and cheating to present bias and impulsivity
Gino et al (2011) - individuals are more likely to cheat when they are depleted of self-regulation => self-control problems
List (2006)
Gift exchange experiments, buyers make offers to sellers and sellers select quality provided.
Context: sports cards fairs, unrated cards and two experiments: lab and field to explore external validity
Results:
- Lab: strong evidence for shame aversion, social preferences, higher prices rewarded with higher utility, even though seller is not obligated to provide
- Field: little relationship between price and quality, unless dealers are locals - concerned with reputation e.g. reciprocity
Only once a grading system introduced, evidence for standard model of gift exchange based on reputation rather than social preferences themselves
Currency of Reciprocity (Kube et al, 2012)
Tests how strongly workers reciprocate non-monetary and monetary gifts with higher productivity
4 treatments:
- cash treatment - monetary gift 20% wage increase
- bottle treatment - thermos bottle
- choice - cash or bottle - almost all chose cash
- origami treatment - money in the form of origami
Results:
- more chose the money option but the effect of higher productivity is the same as if they chose bottle, showing that it is not the non-monetary gift, but the thought behind it - signalling altruism
- origami effect was more effective - thoughts drive better results - workers reciprocate kindness
Bandiera et al 2005
Productivity lower under relative incentives - workers partially internalise the neg externalities - if I work harder, you’re paid less
effect is particularly strong if more friends internalised the externality
Analytical Game Theory assumptions
- people have the correct mental representation of the relevant game
- people have unbounded rationality
- equilibria are reached instantly
- people are motivated by self-interested (not selfishness)
Camerer (2003)
Standard assumptions of analytical game theory are a concerned for behavioural game theory
- people do not always have a correct mental representation
- they have bounded rationality, allow for players to anticipate that others make mistakes
- learning in repeated games, scope for reputation, commitment, and reciprocity, guilt aversion
- not just self-interest and money, but also social preferences
Traveller’s Dilemma
- 2 travellers returning with damaged goods and the airline manager reassures that they will be compensated.
- each have to write the price down of the antique between 2 and 100.
- if both write the same number, they will be compensated
- if one writes less, then the traveller that wrote less gets a reward (R) and the other with the higher number gets a punishment, say +2 and -2.
- The AGT logic predicts that NE will be 2,2. because there is always an incentive to undercut the other player when the reward is high and each player undercuts, until they reach the minimum threshold where they cannot undercut further
- Predicts well when R is large, poorly when R is small
Why?
The higher the reward for being honest/ cost for being greedy, the lower the incentive to undercut, because the risk associated with undercutting and the guilt is stronger.
Minimum Effort Coordination Game
Two players choose effort with associated cost.
Payoffs are the minimum of the two effort levels, minus own effort * cost.
No incentive to undercut, as will not increase payoff
e.g. Player 1: 120, Player 2: 130
P1: 120-120c
P2: 120-130c
if P1 deviates to 121, payoff is P1: 120-121c => loses c
if deviates to 119, payoffs are P1: 120-120c
P2: 119-119c => loses 1-c>0
Low efforts costs (0.1) lead to highest effort levels - risk of picking higher effort is low
High effort costs (0.9) lead to lower effort levels - higher risk of picking higher effort
=> inconsistent with AGT
Ultimatum Game
Player 1 (proposer) is given a fixed amount of money £10.
Stage 1: Player 1 proposes a division, offering z to Player 2 (between 0.01 and 10)
Stage 2: Player 2 will either accept or reject
AGT: if strictly money maximisers, then Player 1 will always offer the smallest amount possible and Player 2, anticipating this will always accept as 0.01 > 0.
but: in reality we see rejection of offers , inconsistent with game theory
Why?
Reciprocity, concerns about fairness and equity
Dictator Game
same with ultimatum game but second stage eliminated
If strictly money maximisers, then Player 1 will always offer the smallest amount possible
Explanations;
- motive other than self-interest: e.g. altruism= people care for the welfare of others.
- inequity aversion: payoff decreases when the difference between us is high
- positional preferences: my utility decreases when the other player’s money increases
Fehr and Schmidt (1999)
Social preferences as explanation - inequity aversion: payoff decreases when the difference between us is high - BEST EXPLANATION
see notes p.23 for diagram
Other forms of social preferences:
- Altruistic: utility increases when others increases
- Competitive/positional- opp. to altruistic
- Rawlsian (justice is fairness - concerned with the outcome of the least well off)
- utilitarian: maximising utility of all concerned
