Evidence of Other-Regarding Preferences

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Roman Sheremeta, Ph.D.

Professor, Weatherhead School of Management

Case Western Reserve University

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Foundation of the utility function�

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Homo economicus�

• How would you characterize a homo economicus individual?
• Perfectly rational
• Maximizes expected utility
• Cares only about monetary incentives
• Selfish (self-regarding preferences)

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The “standard” model�

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Problems with the “standard” model�

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Evidence of Other-Regarding Preferences

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Looking for homo economicus�

• Let’s test if you are a homo economicus…

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• When you pay for food in a restaurant, do you leave a tip?
• Living a tip is not legally required

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• Does your tipping percentage change? (Yes/No)
• When you visit other countries
• When the bill is very expensive
• When you are on a road trip eating at a restaurant that you will probably never go to again
• When the service is bad

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• Homo economicus would answer No to all of the above

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Other-regarding preferences�

• Other-regarding preferences: the degree and nature of how people care about the well-being of others

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• There are many reasons why people leave a tip:
• Altruism
• Warm glow (enjoy giving)
• Reciprocity
• Fairness
• Inequity aversion
• Face-saving concerns

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• Next, we look at the evidence of other-regarding preferences from different experiments

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The Ultimatum game�

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The Ultimatum game�

• What are the typical results in the ultimatum game?
• The average offer is around $3-$5
• Low offers are often rejected
• Results hold when the stakes are high (three months’ wages)
• Results hold across cultures and societies

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• Why do Proposers make generous offers?
• Proposers care about fairness and equity
• Proposers fear that the Responder will reject the offer

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• Why do Responders reject low offers?
• Responders dislike being treated unfairly
• Responders dislike inequity

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The Dictator game�

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The Dictator game�

• What are the typical results in the dictator game?
• Most Proposers offer a positive amount
• The average offer is around $1-$3
• Lower than the average offer in the ultimatum game

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• Why do Proposers make positive offers?
• Proposers care about fairness and equity
• Proposers do not want to be seen as selfish

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• These findings point out that most individuals are not homo economicus and have other-regarding preferences

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Experiment #1 results�

• Class experiment:
• Ultimatum and Dictator game

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The Dictator game�

• Baby lab
• “Born good? Babies help unlock the origins of morality” (10:20-11:50)
• https://www.youtube.com/watch?v=FRvVFW85IcU

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The Trust game�

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The Trust game�

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Experiment #2 results�

• Class experiment:
• Trust game

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The Public Goods game�

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The Public Goods game�

• The findings of Fehr and Gachter (2000):
• The opportunity to punish increases contributions
• Partners have higher rates of cooperation than strangers

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The Public Goods game�

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Experiment #3 results�

• Class experiment:
• Public Goods game

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Summary�

• The existing experimental evidence points out:
• Responders in the ultimatum game reject small positive offers
• Proposers in the dictator game make positive offers
• Trustees in the trust game return significant amounts
• Contributions in the public good game are higher than 0

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• These findings point out that most individuals have other-regarding preferences

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References�

• Berg, J., Dickhaut, J., & McCabe, K. (1995). Trust, reciprocity, and social history. Games and Economic Behavior, 10(1), 122-142.
• Dhami, S. (2016). The Foundations of Behavioral Economic Analysis. Oxford University Press.
• Fehr, E., & Gachter, S. (2000). Cooperation and punishment in public goods experiments. American Economic Review, 90(4), 980-994.
• Güth, W., Schmittberger, R., & Schwarze, B. (1982). An experimental analysis of ultimatum bargaining. Journal of Economic Behavior & Organization, 3(4), 367-388.
• Hertwig, R., & Ortmann, A. (2001) Experimental practices in economics: A methodological challenge for psychologists? Behavioral and Brain Sciences, 24, 383-451.

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