1. SS200: Social preferences Colin F. Camerer, Caltech  Self-interest is a useful, common assumption…but!  Skepticism that any social preference other than self- interest is fragile: “when self-interest and ethical values with wide verbal allegiance are in conflict, much of the time, most if the time in fact, self-interest theory…will win.” (Stigler)  Challenge is to have a general, precise, accurate, psychologically plausible model of social preferences –Distributional (inequity-aversion. Fehr-Schmidt, Bolton- Ockenfels, Charness-Rabin) –Reciprocal (Rabin et al) –“Signaling” or self-image (Levine, Bernheim, Rotemberg)

2. Ultimatum game  Proposer offers division of $10; responder accepts or rejects  Theories: –Rejections express social preferences (care about $, envy, guilt) –“Unnatural habitat” (adapted to repeated games, one-shot is Stroop)  Variants: –Dictator games (same responsibility?) –Demographics (generally weak) –Stakes– rejected $ goes up, % goes down –Repetition etc.– weak –Low information about “pie” size  lower offers (and “pleading poverty ”) –Proposer competition  offers give most to responder –Two-stage games  responders (weakly) accept lower offers because proposers have an “excuse” (intentions matter)

3. Game-ending ultimatum rejections are like “disadvantageous counterproposals” in longer games

4. US data (Roth et al 1991)

5. Ultimatum vs dictator “games” (Forsythe et al 1994) NB: Dictator games are “weak situations”, more variance

6. Low, medium, high stakes (Slonim-Roth 1998)

7. Do players learn to accept low offers at high stakes? No. Would learn a lot more from the strategy method (acc/rej for all offers)

8. Special subject pools & conditions  Neural evidence (ACC, DLPFC, insula for low offers; difference predicts rejection r=.4)  Autistics offer less (don’t expect rejection) –Adults learn to take “objective stance”  Cutting-off-nose effect (Monkeys reject unequal pay, Brosnan and De Waal, Science 9/18/03; F capuchins will refuse exchange for low payoff if others get high payoff)  Small-scale societies –Variation in mean offer (some offer very little) –Fair offers correlated with “market integration” and “cooperativeness”

9. “Market” games (9-proposer competition)

10. Intentions matter (Falk et al 99) (cf. law e.g. manslaughter vs murder)

11. Sanfey et al fMRI study (Sci 13 March ’03)

12. “ask the brain”: within (L) and pooled (R) correlations of insula and DLPFC activity & rejection

13. Feeling: This is your brain on unfairness

14. Pain circuitry

19. Ultimatum offer experimental sites

20. slash & burn gathered foods fishing hunting The Machiguenga independent families cash cropping

21. African pastoralists (Kenya)

22. Whale Hunters of Lamalera, Indonesia High levels of cooperation among hunters of whales, sharks, dolphins and rays. Protein for carbs trade with inlanders Researcher: Mike Alvard

24. Ultimatum offers across societies (mean shaded, mode is largest circle…)

26. Fair offers correlate with market integration (top), cooperativeness in everyday life (bottom)

27. Ultimatum offers of children who failed/passed false belief test

28. Autistics v normals (adults top, children bottom)

29. Israeli subject (autistic?) complaining post- experiment (Zamir, 2000)

30. Unnatural habit hypothesis…  "Although subjects fully understand the rules of the game and its payoff structure, their behavior is influenced by an unconscious perception that the situation they are facing is part of a much more extended game of similar real-life interactions…We believe that it is practically impossible to create laboratory conditions that would cancel out this effect and induce subjects to act as if they were facing an anonymous one-shot [ultimatum game]." (Winter & Zamir, 1997)

31. Testing theories: New ideas  How to separate preference vs unnatural habitat views? –Role of emotions –Look for cross-game regularity in measured preferences –Learning (…or is it temporary satiation?) –fMRI and ACC Stroop interpretations –Rationalization and “moral wriggle room” (Weber, Dana, Kang 04)  State ALT A=(6,1) vs B=(5,5) or State DUMB A=(6,1) vs B=(5,1)  Do you want to know the state?

32. Theories  Sobel general form  Key: What are weights λ ij ?  Fehr-Schmidt: 0 for guilt  Bolton-Ockenfels, similar but x i,, deviation of share from equality (bad blow: (5,5) vs (8,2)..reject gives 10%. Should never reject, reject (8,2) 40% of the time)  Charness-Rabin: me-min.-total (Rawlsitarian)  Levine: α i is i altruism, β i wt on j

33. Theories, 2: Intentions  Intentions seem to matter (Rabin)  Chicken: (D,C) and (C,D) are Nash –but if fairness is large, (D,D) and (C,C) are fairness equilibria (thin line between love (C,C) and hate (D,D)) –Cf. gift of the magi (O. Henry), locket and comb

34. Fehr-Gachter JEP 2000 paper  Opportunism: “Self-interest seeking with guile…” (Wmson). Guile is the interesting part?  Alternative: –Reciprocity– repay in kind-- + self-interest –Evidence:  PD cooperation + expectations  Ultimatum (negative), trust (positive)

35. Fehr-Gachter JEP 2000 paper, III  Public goods with punishment –N=4. Social return 1.6, private (MPR).4 –Punish x units at cost of (1/3)x –Punishment by “police” works! (pp 516-517 ABE)  Contracts in gift-exchange w/ moral hazard –Prepay a wage. Worker chooses effort –Positive wage-effort relation: Reciprocity or correlated types (Healy) –Crowding out by complete contracts –Wage competition is resisted by firms– don’t hire cheapest worker (p 524)

36. Moral hazard in contracting: Theory and experimental evidence  Fehr setup: –Firms offer w –Firms earn 10e-w –Workers choose e –Workers earn w-c(e) –No reputations (cf. PJ Healy)

37. Competition does not drive wages down…firms choose high wage offer workers & expect reciprocity

38. Sobel JEcLit 2004 review  Intrinsic reciprocity (one-shot) vs instrumental reciprocity (repeated games)  Theories  Topics: –Charity –Holdup problem (Bewley “fanciful”) –Crowding out (benabou-tirole, Gneezy- Rustichini) –Markets (“markets make people look selfish”)

39. Public goods with and without cooperation

40. Responder competition: Self-interested behavior can emerge from structure (Guth et al, Fehr et al)

41. Benabou-Tirole REStud 03  Workers infer task difficulty or skill from wage offer (“overjustification”, “self-perception”, “looking glass self”) –Worker exerts effort 0,1, cost is c in [c *,c*] –Worker gets signal σ correlated with c –Success pays V to agent, W to firm –Θ is probability of success given effort –Firm offers bonus b –Worker exerts effort c(σ,b) σ*(b) –Prop 1: In equilibrium  Bonus is short-term reinforcer: b 1 σ*(b 2 )  Rewards are bad news: b 1 <b 2  E[c|σ 1,b 1 ] < E[c|σ 2,b 2 ] –Empirical leverage: Negative effect occurs only if firm knows more about task difficulty or worker skill than the worker knows

42. 2. Crowding out  Do extrinsic ($) incentives crowd out intrinsic motivation? –Do puzzles for $ or no-$. After $ removed, no-$ group does more puzzles (Deci et al) –Female tennis players: Play for fun as kids… …later on tour, quit after getting appearance fee –Q: Is it a “strike” or permanent decrease in incentive?

43. Sobel JEL arguments & counterarguments: “Restricting theory to use only a subset of available tools is not discipline. It is a handicap.”  If it ain’t broke don’t fix it. –It is broke  Social prefs too hard for agents or theorists –Traditional models impose no limits; why start now? –There are tractable models. No harder than other theory.  Evolutionary models show only selfishness persists –False.  “No other approach of comparable generality…” –Social prefs even more general  Econ needs discipline from self-interest and “well understood general principles” –Discipline comes from good scientific practice (and facts)  Standard models make precise predictions. Social won’t. –False: E.g. intrinsic reciprocity tightens up folk theorem results  Too many free variables. –Single model applied to many domains.