2. To cover the findings on social preferences & individual
behavior
To understand the link between microlevel preferences
& macrolevel outcomes for these findings
Aim Lecture 5
3. 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
EXPERIMENTS
WE KNOW THAT
4. Dictator game
Ultimatum game
Gift exchange game
Trust game
Public goods game
EXPERIMENTS
Measure various aspects of people’s
social preferences
7. Dictator game
Forsythe et al. 1994
What is the rational behavior of the sender?
A rational and selfish dictator will keep all the money
ALTRUISM
8. Dictator game
No support for the selfish prediction
A rational and selfish dictator will keep all the money
What is the rational behavior of the sender?
Positive Sharing
Altruism
Other-regarding Preferences
9. Dictator game
No 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
10. Ultimatum game
Guth et al. 1982
Sender
FAIR SHARING
Offers around 40% to 50%
Receiver
Rejects offers below 30%
Offers in the ultimatum game are substantially higher than
in the dictator game. Why?
11. Ultimatum game
Proposer
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
12. 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:
14. Effort is not contractible
Fehr et al. 1993
Gift Exchange
Effort Profit employer Cost employee Payoff employee
Wage Profit employer Payoff employee
What is the rational behavior?
15. Effort is not contractible
Rational players
Gift Exchange
Irrespectively of the wage, will choose the minimum effort (costly)
Employees:
Have incentives to pay the lowest wage
Employers:
18. The Trust Game
Berg et al. 1995
Trust &
Trustworthiness
What is the rational behavior of the receiver?
What is the rational behavior of the sender?
19. The Trust Game
What 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
20. Measuring Trust
Why 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
21. Trust Game
Findings
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
23. Cooperation &
Free-riding
PD & PG Games
They are the most important vehicle
for studying cooperation problems
in controlled laboratory experiments
24. Prisoner’s Dilemma
It’s been extensively studied
Main aspects of interest:
The extent of cooperation in one-shot games
The importance of strategic incentives
25. Two studies
Cooper et al. 1996 & Andreoni and Miller 1993
Design:
Ten rounds
Two treatments: Stranger & Partner
What is the rational behavior?
26. Rational PD
What 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
27. 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
28. 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
29. 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
32. Public Goods Game
What 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
34. PG Game
Main 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?
35. Altruistic Punishment
The only way a cheated cooperator can avoid
being a sucker is by reducing cooperation
Punishing everyone, even other cooperators
36. 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
37. 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
38. Results
Strong increase in contributions, with punishment
Partners contribute more than strangers
100% > 60% of the endowment
39. 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
40. 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
41. 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
42. Micro-Macro
Conditional cooperators cooperate if
others cooperate
If there are free-riders, conditional
cooperators 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
43. 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
