Social PreferencesLECTURE 5

RATIONALITY &

To cover the findings on social preferences & individual behavior

To understand the link between microlevel preferences & macrolevel outcomes for these findings

Aim Lecture 5

Experiments run according to a fixed protocol

Participants receive written rules of the game

Decisions are usually anonymous

Subjects get paid depending on their decisions (no flat payment)

No deception

EXPERIMENTSWE KNOW THAT

Dictator game

Ultimatum game

Gift exchange game

Trust game

Public goods game

EXPERIMENTSMeasure various aspects of people’s

social preferences

Practical 4Dictator Game

Dictator gameForsythe et al. 1994

What is the rational behavior of the sender?

ALTRUISM

Dictator gameForsythe et al. 1994

What is the rational behavior of the sender?

A rational and selfish dictator will keep all the money

ALTRUISM

Dictator gameNo support for the selfish prediction

A rational and selfish dictator will keep all the money

What is the rational behavior of the sender?

Positive SharingAltruismOther-regarding Preferences

Dictator gameNo support for the selfish prediction

22% transferred a positive amount

Dictators share about 28% of their endowment

However, it matters:

Who is the recipient?

Higher transfers to a charity than to another participant

Sociodemographical Background

Older dictators transfer more money than younger ones

Ultimatum gameGuth et al. 1982

Sender

FAIR SHARING

Offers around 40% to 50%ReceiverRejects offers below 30%

Offers in the ultimatum game are substantially higher than in the dictator game. Why?

Ultimatum gameProposer

FAIR SHARING

If the proposer expects that a low offer might be rejected, it is rational to offer an amount more likely to be accepted

The fact that people reject offers poses a bigger challenge

People might reject for emotional reasons

They feel unfairly treated and want to punish greedy intentions

Methods

Low offers

Neuro-scientific

Activate areas of the brain associated with anger and disgust

People reject low offers because they consciously want to reject them

Sanfey at al. 2003

Strength of activation of these areas

Predicts the probability of rejection quite well

Social Preferences:

Practical 5Gift Exchange

Effort is not contractibleFehr et al. 1993

Gift Exchange

Effort Profit employer Cost employee Payoff employee

Wage Profit employer Payoff employee

What is the rational behavior?

Effort is not contractibleRational players

Gift Exchange

Irrespectively of the wage, will choose the minimum effort (costly)

Employees:

Have incentives to pay the lowest wage

Employers:

Positive ReciprocityFindings

Gift Exchange

tend to reward generous wage offers by high effortsEmployees:

Practical 6Trust Game

The Trust GameBerg et al. 1995

Trust & Trustworthiness

What is the rational behavior of the receiver?

What is the rational behavior of the sender?

The Trust GameWhat is the rational behavior of the investor and the receiver?

Selfish recipients will not return anything, irrespective of the amount received

Recipient:

Investor:Rational and selfish investors would foresee this and invest nothing

Measuring TrustWhy does the game measures trust?

Any amount transferred is tripled

Transferring the whole endowment will maximize the joint income of both players

Transferring “X” pays off only if receiveing at least “X” back

Sending a positive amount signals trust

Back transfers measure trustworthiness

Trust GameFindings

Trustors send on average $5.16 (between $0 and $10)

Trustees return on average $4.66

Almost 50% of the trustees returned a positive amount (25% exceeded the initial transfer)

Older people trust more & are more trustworthy

Practical 7PD Game

Cooperation & Free-riding

PD & PG Games

They are the most important vehicle for studying cooperation problems in controlled laboratory experiments

Prisoner’s DilemmaIt’s been extensively studied

Main aspects of interest:

The extent of cooperation in one-shot games

The importance of strategic incentives

Two studiesCooper et al. 1996 & Andreoni and Miller 1993

Design:

Ten rounds Two treatments: Stranger & Partner

What is the rational behavior?

Rational PDWhat is the rational behavior?

Why? Stranger: Each play is against a new opponent (one-shot)

Partner: Backward Induction- In the last period both will defect, and so on...

Under assumptions of selfishness and rationality, all players in both conditions are predicted to defect

Findings PD

Stranger: Cooperation at least 20% of the times

Partner: Cooperation at least 50% of the times

People are prepared to cooperate even in one-shot games

The possibility to behave strategically strongly increases cooperation

Repeated Cooperation

What happens if groups become larger?

The strategic gains from cooperation that comes from repeated interactions are a powerful force in explaining real-world cooperation in small and stable groups

Large Groups?What happens if groups become larger?

Bilateral PD: A player can punish a defector by defecting as well

Large Groups: Not possible. Defection punishes defectors and other cooperators

Punished cooperators might then defect

Practical 8PG Game

Public Goods GameExperiments study cooperation for the

provision of public goods

What is the rational behavior?

Public Goods GameWhat is the rational Behavior?

A rational and selfish individual has incentive to keep all the points

The group:

Better off, as a whole, if everybody contributes all 10 points

Tension between individual incentives & collective benefits

PG GameCommon Results

Design: 10 rounds 20 tokens Partner & Stranger

PG GameMain Findings

Positive contributions (one-shot) Sociodemographic Variables:

Older people cooperate more Rural residents contribute more than urban ones

Strategic incentives matters Partners contribute more than strangers

Contributions decline over time to very low levels

Why?

Altruistic Punishment

The only way a cheated cooperator can avoid being a sucker is by reducing cooperation

Punishing everyone, even other cooperators

If group members can identify a defector and punish her or him

Will this

Altruistic Punishment

Solve the free rider problem Prevent the breakdown of cooperation

Design:

Punishment in Repeated PG Games

Second Stage: after subjects made their contribution Information: Contribution of each group member Punishment: Max. 10 points to each group member (costly)

For every point, the punisher’s income decreases 10% Treatments: Stranger & Partner

Fehr and Gachter 2000

Results

Strong increase in contributions, with punishment Partners contribute more than strangers

100% > 60% of the endowment

Micro-Macro Link

Relation between individual motives & behavior of the collective

Cooperation declines over time

Results in PG games without punishment

Cooperation stabilizes or increases

Results in PG games with punishment

These differences in microlevel motivations produce a macrolevel outcome in which everyone eventually free-rides

Why the decline?

Some are free riders, independently of others’ contributions Some are conditional cooperators

Perhaps people are heterogeneous in their cooperative inclinations

Micromotives Macrobehavior

Fischbacher and Gachter 2010

Design: Indicate contributions in the strategic form Free-riders: No contribution - 30% Conditional cooperators: Increase contribution. -50%

Other 20% complicated patters

Micro-MacroConditional cooperators cooperate if

others cooperate

If there are free-riders, conditionalcooperators reduce their contribution

Social preferences can explain the decay of cooperation

Even if not everyone is motivated selfishly, the aggregate outcome is one in which everyone

behaves selfishly

Checklist

Individuals cooperate in different strategic conditions - even when the interaction only occurs once

Cooperation is affected by strategic behavior - interacting repeatedly with others increases it

Cooperation declines over time even between partners

Potential punishment increases cooperation and stabilizes it along time

Questions?