Modeling Social Preferences: A Generalized Model of Inequity Aversion

Khan, Hayat (2009): Modeling Social Preferences: A Generalized Model of Inequity Aversion.

Abstract

Taking note of the wide variety and growing list of models in the literature to explain patterns of behavior observed in laboratory experiments, this paper identifies two tests, the Variety Test (ability of a model to explain outcomes under variety or alternative scenarios) and the Psychological Test (ability of a model to conform to psychological intuition), that can be used to judge any model of other-regarding behavior. It is argued that for a mathematical model to qualify as a social welfare function, it must simultaneously pass the two tests. It is shown that none of the models proposed to date passes these two tests simultaneously. The paper proposes a generalized model of inequity aversion which parsimoniously explains interior solution in the dictator game and dynamics of outcomes in other games. The paper postulates that one’s idea of equitable distribution is state-dependent, where the state is determined by psychological and structural parameters. The state could be fair, superior or inferior. Individuals in a fair state have zero equity-bias and split the pie evenly. Those in a superior (inferior) state have positive (negative) equity-bias and value more (less) than fair distribution as equitable distribution. Given psychological tendencies of an individual, every experimental design/structure assigns one of the three states to players which lead to individual-specific valuation of equity. Prediction about outcomes across different experiments and designs can be made through predicting their impact on equity-bias. All aspects of an individual’s behavior, such as altruism, fairness, reciprocity, self-serving bias, kindness, intentions etc, manifest themselves in the equity-bias. The model therefore is all-encompassing.

• Item Type: MPRA Paper
• Language: English
• Keywords: Experimental Economics; Social Preferences; Other Regarding Preferences; Inequity aversion
• Subjects: D - Microeconomics > D6 - Welfare Economics > D63 - Equity, Justice, Inequality, and Other Normative Criteria and Measurement; A - General Economics and Teaching > A1 - General Economics > A13 - Relation of Economics to Social Values; C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C92 - Laboratory, Group Behavior; C - Mathematical and Quantitative Methods > C0 - General; D - Microeconomics > D6 - Welfare Economics > D64 - Altruism ; Philanthropy; C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior

References

Bardsley, N., 2005 "Altruism or Afterfact? A Note on Dictator Game Giving." not yet published.

Bereby-Meyer, Y. and Niederle, M. 2005. “Fairness in Bargaining.” Journal of Economic Behavior and Organization, 56, 173-186.

Blount, S., 1995. "When Social Outcomes aren’t Fair: The Effect of Causal Attributions on Preferences," Organizational Behavior and Human Decision Processes LXIII, 131-144.

Bolton, G., E., and Zwick, R., 1995. "Anonymity versus Punishment in Ultimatum Bargaining," Games and Economic Behavior, Elsevier, vol. 10(1), 95-121.

Bolton, G., E. and Ockenfels, A., 2000, “A Theory of Equity, Reciprocity and Competition”, American Economic Review, 100, 166-193.

Bolton, G., Katok, E., Zwick, R., 1998, "Dictator Game Giving: Rules of Fairness Versus Acts of Kindness." International Journal of Game Theory, 27 269-299.

Brańas-Garza, P., 2006, “Poverty in Dictator Games: Awakening Solidarity,” Journal of Economic Behavior & Organization, 60(3), 306—320

Brandts, J. and Charness, G., 2004, “Gift-Exchange with Excess Supply and Excess Demand”, mimeo, Pompeu Fabra, Barcelona.

Camerer, C., and Thaler, R. H.,. 1995, Anomalies: Ultimatums, dictators and manners. J. Econ. Persp. 9:209–219.

Camerer, C. and Thaler, R., H., 1995. Ultimatums, Dictators and Manners. Journal of Economic Perspectives 9, 209-19.

Camerer, C., F., 2003, Behavioral Game Theory, Experiments in Strategic Interaction, Princeton: Princeton University Press.

Charness, G., and Rabin, M., 2002, “Understanding Social Preferences with Simple Tests”, Quarterly Journal of Economics, 117, 817-869.

Cox, J. C., Friedman, D., and Gjerstad, S., 2004, “A Tractable Model of Reciprocity and Fairness,” mimeo, University of Arizona.

Cox, J. C., Friedman, D. and Gjerstad,S., 2007. "A Tractable Model of Reciprocity and Fairness," Games and Economic Behavior, Elsevier, vol. 59(1), pages 17-45, April.

Dufwenberg, M. and Kirchsteiger. G. 2004, “A Theory of Sequential Reciprocity.” Games and Economic Behavior, 47, 268-98.

Erlei, M., 2004, “Heterogeneous Social Preferences”, mimeo, Clausthal University of Technology.

Falk, A., Fehr, E., and Fischbacher, U., 2000a. “Informal Sanctions”, Institute for Empirical Research in Economics, University of Zurich, Working Paper No. 59.

Falk, A., Fehr, E., and Fischbacher, U., 2000b. “Testing Theories of Fairness - Intentions Matter”, Institute for Empirical Research in Economics, University of Zurich, Working Paper No. 63.

Falk, A. and Fischbacher, U., 2001. “A Theory of Reciprocity,” CEPR Discussion Paper no. 3014, University of Zurich.

Falk, A., Fehr, E., and Fischbacher, U., 2003. “On the Nature of Fair Behavior,” Economic Inquiry, 41, 20-26.

Fehr, E. and Schmidt, K., M., 1999. “A Theory of Fairness, Competition and Co-operation.” Quarterly Journal of Economics 114, 817-868.

Fehr, E. and Schmidt, M. K., 2005, “The Economics of Fairness, Reciprocity and Altruism - Experimental Evidence and New Theories,” Discussion paper 2005-20, Department of Economics, University of Munich.

Güth, W. and Damme, V. E. 1998. “Information, strategic behavior and fairness in ultimatum bargaining: An experimental study,” Journal of Mathematical Psychology, 42, 227-47.

Hoffman, E., McCabe, K., Shachat, K. and Smith, V., 1994a, "Preferences, Property Rights and Anonymity in Bargaining Games," Games and Economzc Behaulor, 7 , 346-80.

Hoffman, E., McCabe, K. and Smith, V., 1994b, "Social Distance and Other-Regarding Behavior in Dictator Games," working paper, University of Arizona.

Hoffman, E., McCabe, K., Smith, V., 1999 "Social Distance and Other-Regarding Behavior in Dictator Games: Repply." The American Economic Review, 89 (1), 340-341.

Horita, Y., & Yamagishi, T. 2007, “The rejecting for maintaining self-image in the ultimatum game” The 12th International Conference of Social Dilemma, Seatle (WA, USA).

Kagel, J. H., Kim, C. and Moser, D., 1996, “Fairness in Ultimatum Games with Asymmetric Information and Asymmetric Payoffs”, Games and Economic Behavior, 13, 100-110.

Kagel, J. H. and Wolfe, K. 2001. “Tests of fairness models based on equity considerations in a three-person ultimatum game,” Experimental Economics, 4, 203-19.

Levine, D., 1998, “Modeling Altruism and Spitefulness in Experiments”, Review of Economic Dynamics, 1, 593-622.

Offerman, T., 1999. “Hurting hurts more than helping helps: The Role of the self-serving Bias”, mimeo, University of Amsterdam.

Ottone, S. and Ponzano, F., 2005. "An Extension to the Model of Inequity Aversion by Fehr and Schmidt," P.O.L.I.S. department's Working Papers 51 Department of Public Policy and Public Choice – POLIS

Rabin, M., 1993. “Incorporating Fairness into Game Theory and Economics,” American Economic Review, 83, 1281-1302.

Rotemberg, J., 2004. “Minimally Acceptable Altruism and the Ultimatum Game,” mimeo, Harvard Business School.

Schotter, A., Weiss, A. and Zapater, I., 1996 "Fairness and Survival in Ultimatum and Dictatorship Games." Journal of Economic Behavior & Organization, 31 37-56.

Schotter, A., Weiss, A. and Zapater, I., 1994, "Fairness and Survival in Ultimatum Games," unpublished paper, New York University Department of Economics.