Topic 3 (Karine Nyborg):
Social preferences and fairness
• Are we perfectly selfish?
• If not, does it affect economic analysis?
• How to take it into account?
Overview readings:
– Fehr and Fischbacher (2002)
– Sobel (2005)
Today’s lecture
• Experimental economics and social
preferences
• Readings:
– Camerer (2003), pp. 43-100
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A thought experiment
• You receive 100 kr
• Your task: Propose how to share between
yourself and another person B
– Your proposal is communicated to B
– Full anonymity
• B’s choice: Accept or reject
– Accept: Both get what you proposed
– Reject: Both get nothing
• What is your proposal to B? (write down!)
• If you were, B, would you accept
15kr?
50 øre?
60 kr?
Experimental economics
• Controlled environment, real incentives
• History of experimental economics
– 1960 + : First economics lab (V. Smith)
– 1980 + : Field takes off
– 2000 + : Field explodes
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Economic vs. psychological
experiments
• Cognitive and social psychology
– Experiments from ca. 1900
• Differences in methodology
– Payment
– Deception
Lab and field experiments
• Laboratory experiments
– Voluntary, knowing participants
– Baseline case vs treatment cases: Change one
variable
• Field experiments
– Naturally occurring environment, imperfect control
– Unknowing participants
– Baseline case vs treatment cases: Change one
variable – but: natural variation may occur
– Example: Effect on charitable giving of solicitation
methods (Lange et al.)
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The dictator game
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A: Dictator
B: Recipient
A gets amount X (ex. 100 NOK).
Task: Share X between A and B
B: Passive recipient
X = xA + xB
Let s = B’s share of X as proposed by A
Let xi = i’s monetary payoff
• If A cares only about his own monetary payoff: Which
s will he choose? (anonymity)
Dictator game findings
• Typical results (see Camerer 2003):
– Average s ≈ 0.2. Most common: s = 0; 0.4 - 0.5.
• Larger s:
– Non-anonymity
– Identifiable victim («has been identified»)
– Deserving recipient (e.g. Red Cross)
• Lower s:
– Earned initial amount
– Option to pass
– Option to take
• Substantial context dependency
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The ultimatum game
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Dictator game where B can reject A’s offer
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1.
2.
3.
4.
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If B rejects: Both get zero.
If B accepts: Each gets amount proposed by A.
A gets X
A offers B a share s
B accepts or rejects
If accept, xA = (1-s)X and xB = sX.
If reject, xA = xB = 0.
If both care only about their own material
payoff: What will they do? (anonymity, oneshot)?
UG with self-interested players
• Assume 50 øre is the lowest strictly positive
amount
• B strictly prefers 50 øre to nothing
• Foreseeing this, A will never offer more than
50 øre
• If A offers 50 øre, B will accept
• Prediction: Minimal offers, no rejections
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The self-interest model
• Can we reason as if money = utility benefits?
• Person i cares only about own income Wi :
(1) Ui = ui (Wi) = ui (Fi + xi )
Fi = i’s exogenous (outside lab) income,
xi = material payoff of i from experiment
ui’ > 0 and ui’’ ≤ 0
– Assume xi is marginal, i.e. ui’ constant wrt xi
• Differentiating: dUi = ui’ dWi = ui’ xi
– Utility change then proportional to xi
Nash equilibrium & subgame perfection
• Nash equilibrium
– Set of strategies such that no player can profitably deviate
from her strategy, given the strategies of the other players.
• Is {s = 0.3, accept any s ≥ 0.3} a NE in the UG?
– B’s strategy is not credible
• Subgame perfect Nash equilibrium
– Eliminates Nash equilibria in which players’ threats are not
credible (hint: backward induction)
– {s = 0.3, accept any s ≥ 0.3}: NE, not SPNE
• SPNE in ultimatum game with self-interested players:
– If 50 øre (s=0.005) is the smallest strictly positive amount:
{s = 0.005, accept any s > 0} is a SPNE
{s = 0, accept any s ≥ 0} is a SPNE
– If s is continuous:
{s = 0, accept any s ≥ 0} is the only SPNE.
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• Did you propose more than 50 øre?
• Did you reject 50 øre?
• Did you reject 15 kr?
• Did you reject 60 kr?
Findings, ultimatum games
• Typical result (Camerer 2003):
– Average offer about 0.4
– Offers of 0.5 very common
– About half of offers < 0.2 are rejected
• Results robust to
– high stakes (up to several months’ wage)
– experience
• Varies with
– age
– culture
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Cross-cultural studies
• Henrich et al. (2001): Ultimatum games in 17
small-scale societies, 5 continents
– Average offers: 0.26 to 0.58
– Rejection of small offers: Varies substantially
– No economy displays both average offers and
rejection rates close to zero
– More market integration: higher offers
– More economies of scale in local economy: higher
offers?
– Average offers above 0.5:
• 0.51 (Ache, Paraguay), 0.58 (Lamelara, Indonesia)
• Norms of potlatch/competitive gift-giving
• ”Hyper-fair” offers: Frequently rejected
Another thought experiment
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You get 600 kr
You are in a group with two other students
How much will you contribute to your group?
All contributions are doubled, then shared
equally between the 3 group members.
• Earnings: 600 kr – your contribution + your
share of total group contributions
• Double-blind
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Ultimatum game:
• Puzzle 1: Why do proposers share?
• Puzzle 2: Why do responders reject?
Competition in the UG
• Proposer competition
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Parallell: one seller, many buyers (move first)
Several proposers make offers to single responder
Responder accepts the highest offer
Proposers whose offers are not accepted get 0
Result (after some repetition): s ≈ 1
Responder gets almost everything
• Responder competition
– One buyer (moves first), many sellers
– One proposer makes offer s. If all responders
reject, all receive 0. If some accept, one of them
drawn randomly, receives share s.
– Results (after some repetition): s ≈ 0
– Proposer gets almost everything
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• Vernon Smith (1991):
• Individuals in the lab often violate standard
assumptions
• Still, market institutions often produce
outcomes consistent with standard theory
Public good games
(voluntary contribution mechanism games)
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Groups of N anonymous subjects
Each subject receives an amount e
Choice: Share e between self and group
Simultaneous choice
Contributions to group: multiplied by m, then
shared equally between N members (1<m< N)
• Contribution maximizing group payoff: e
• Contribution maximizing individual payoff: 0
• N-person prisoners’ dilemma! Only NE:
everyone contributes 0
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PG games: Typical findings
• One-shot, and first stages of repeated trials:
Subjects generally contribute about 40-60 %
– there are substantial contributions and free-riding
• Contributions decline with repetition
– often rather dramatically
• If players can punish each other (at a cost)
– Low contributors are punished
– Average contributions stay high, and may increase
(even to 100 percent, or close to 100 percent).
See Camerer (2003), Fehr and Fischbacher (2002),
Fehr and Gächter (2002).
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Social preferences: General findings
• Compared to predictions of self-interest
model, experiments find that people
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Share more
Contribute more to public goods
Trust more
Sanction more
• Heterogeneity: Some ”egoists”, few ”angels”,
many ”reciprocators”
• Behavior often contingent on others’ behavior
and/or perceived intentions
• Context dependency
Experimental research: purposes
1. Testing the predictions of existing theories
– Is subgame perfect equilibrium reached in UG?
2. Generating new theories
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Unexplained regularities: look for explanations
Do responders reject to punish the proposer?
Test the new hypothesis!
Two-way interaction: Theory
experiments
3. Studying behavior when theory has little to
say
– Testing which is strongest of counteracting effects
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Next time
• Inequity aversion
• Readings:
– Fehr and Schmidt (1999)
– Camerer, C. (2003), pp. 101-104 (compendium)
– Sobel (2005), pp 398-401
Public good games
• Note: Misprint in Camerer (2003, p. 45):
– Endowment = e, contribution to group = ci
– Payoff to player i is
x i  ei  c i  m (  k c k )
1
N
– Individual payoff maximized at ci = 0, group payoff
maximized at ci = e if
1<m<N
– (not m < (1/N) as claimed on p. 45. (correct
expression on p. 103; see also Fehr and Schmidt
1999, p.836. )
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