Behavioral Games and Inequity

7/18/2019 Behavioral Games and Inequity

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Behavioral Gamesand Inequity Aversion

1L5 Behavioral Games and Inequity Aversion



Selfishness Hypothesis

•It is not from the benevolence of the butcher,the brewer, or the baker that we expect ourdinner, but from their regard for their owninterest. We address ourselves not to theirhumanity, but to their self-love, and nevertalk to them of our necessities, but of their

advantage.- Adam Smith (1776): The Wealth of Nations





•How selfish soever man may be supposed, thereare evidently some principles in his nature,which interest him in the fortune of others, and

render their happiness necessary to him, thoughhe derives nothing from it except the pleasureof seeing it.

- Adam Smith (1759): The Theory of Moral Sentiments





•He who was ready to sacrifice his life, as many asavage has been, rather than betray hiscomrades, would often leave no offspring to

inherit his noble nature.- Charles Darwin (1871): The Descent of Man




Outline

•Experimental evidence from the dictator,ultimatum and trust games

•

Inequity aversion model




Dictator Game (DG)




Dictator Game (DG)

•Mean allocation is about 28%

7

Distribution from meta analysis of 20813 subjects

L5 Behavioral Games and Inequity Aversion



Data from Singapore and Beijing

8

0

5 0

0 .5 1 0 .5 1

0 1

b1_5_1Graphs by location

Mean1: 26.5% Mean2: 31.6%




Ultimatum Game (UG)




Ultimatum Game (UG)

•Mean offer is 40%

•Mean rejection rate is 16%

•Mean rejection rate for offers below 20% is50%





11

0

2 0

4 0

6 0

0 .5 1 0 .5 1

0 1


0

1 0

2 0

3 0

4 0

0 .5 1 0 .5 1

0 1


Proposer.

Mean1: 47.3%

Mean2: 46.8%

Responder.

Mean1: 33.2%Mean2: 33.0%




Trust Game (TG)




Trust Game (TG)

•First mover puts in on average in about 50%.

•The average repay is about 95%.

•The return to trust is almost 0.





14

0

1 0

2 0

3 0

0 .5 1 0 .5 1

0 1

b5_01Graphs by location

0

1 0

2

0

3 0

0 .2 .4 .6 0 .2 .4 .6

0 1

b5_101Graphs by location

First Player

Mean1: 11.25

Mean2: 12.16

Second Player Mean1: 9.38

Mean2: 10.08




Does Culture Matter in EconomicBehavior (Henrich 2000)

•Experimental data and analyses have shownthat people from many parts of the world(Europe, Asia, and North America) behavequite similarly in the UG.

•Does culture matter in economic behavior?




The Machiguenga

•People live in Amazon Basin jungle regions ofsoutheastern Peru

•

Families fully produce for their own needs(food, clothing, etc)

•They do not rely on institutions or otherfamilies




Experimental Design

•Explain the game several times

•Ask a number of hypothetical, practice

questions intended to test the participants’comprehension of the game

•Assign proposers and responders randomly




Experimental Result

•The proposers on average offered only 26percent, and nearly half of the offers werebelow 20 percent.

•The responders almost always acceptedoffers less than 20 percent, The overallrejection rate was also quite low, 4.8 percent.




Discussion

•Where do people get their rules,expectations, or notions of fairness from?

•

Why do these rules, expectations, andnotions seem to vary among groups ofpeople?

•How much can these varying rules,

expectations, and notions affect realeconomic behavior?




Methodological Variables

•Culture

•Stake

•Repetition

•Competition

•Communication

•Entitlement

•Framing•Language

•Emotion




Demographic Determinants

•Age

•Gender

•

Socioeconomic conditions•Childhoods experiences

•Academic Major




A Theory of Fairness, Competition, andCooperation (Fehr and Schmidt, 1999)

•Selfishness in the market settings•Competitive markets, e.g., Auction market

•Free-riding

•Regards for others in other settings•Bilateral bargaining, e.g., fair wage

•Voting, taxation




The Model

•Consider the utility of Player 1 when Player 1receives and Player 2 receives .•Disadvantageous inequity:

≥

•Advantageous inequity: ≥

•

, = − − ≥ − − ≥ • Inequity aversion: ≥ 0 and ≥ 0, Player 1

dislikes inequity, regardless either player is indisadvantage.

L5 Behavioral Games and Inequity Aversion 23



The Model

• ≤ : Player 1 suffers more from inequality

that is to his disadvantage.

• ≥ 0: We rule out the existence that Player 1

likes to be better off than Player 2.

• Suppose

= −1, , = 2 − when ≥ , Player 1 prefer to reduce Player2’s payoff.




The Model

• < 1: We rule out the possibility that Player 1would like to throw money away order to reducehis advantage relative to Player 2.

• Suppose = 2, , = 2 − when ≥, the subject would throw his/her money away until =




The Model

•On the other hand, there is no justification to putan upper bound on •Suppose

= 4,

,

= 5

− 4 when

≥, then Player 1 is willing to give up one dollar if thisreduces the payoff of Player 2 by 1.25 dollars.




Example: the Ultimatum Game

• In the ultimatum game, the proposer proposes (1-s,s) to share the pie, in which s for the responder and1-s for the proposer. The responder decides

whether to accept or reject the proposer. Whatwould the theoretical prediction for s* andrejection behavior under F-S model?

•As the ultimatum is a sequential game, we use

backward induction. We first consider responder’sbehavior, and then the proposer’s behavior.





• If the proposer propose s≥0.5

• The utility of a responder from accepting s is U2(s)=s-2(s-(1-s))=s+2-22s.

•

The utility of a responder from rejecting s is 0.• s+2-22s > 0 as 2<1. Responder would accept.

• If the proposer propose s<0.5• The utility of a responder from accepting s is U2(s)=s-α2(1-2s)

•

The utility of a responder from rejecting s is 0.• Responder would accept if s-α2(1-2s)>0, that is, s is greater

than the threshold s*= α2/(1+2α2) and s < 0.5.





•Proposer will not offer s>0.5, as this reduce his/herutility relative to s=0.5

•For s≤0.5, U1(s)=(1-s)-1(1-2s)=(21-1)s -1+1• If 1>0.5, the utility of proposer is strictly increasing in s for

all s≤0.5. Therefore s=0.5.

• If 1=0.5, the proposer is indifferent for any amount of s, buthe/she has to make sure that the responder accepts theoffer. Therefore: sє[s*, 0.5].

• If 1<0.5, the utility of proposer is strictly decreasing in s forall s≤0.5, but he/she has to make sure that the responderaccepts the offer. Therefore s= s*.




Discussions

•Equity vs efficiency

•Intention

•

Market behavior•Price gouging

•green marketing

•CEO pay after financial crisis


Documents

Behavioral Games and Inequity