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Application of Other-Regarding Preferences

Roman Sheremeta, Ph.D.

Professor, Weatherhead School of Management

Case Western Reserve University

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The inequity aversion model�

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The ERC model�

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The efficiency concern model�

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The impure altruism model�

Makes me feel good!

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The intension-based model�

Care about the action of the other individual!

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Application of Other-Regarding Preferences

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Charitable giving�

Some facts:

The average age of the US donor is about 60 years old
In total, US citizens donate about 2% of GDP
Most charitable giving comes from individuals (70%), followed by foundations (15%)
December is the largest giving month of the year

Why do people give?

Tax benefits (can be explained by the “standard” model)
Altruism (care about the cause)
Impure altruism (makes them feel good)
Social pressure (because they are asked to give)
Social image (others are watching)

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Charitable giving and altruism�

Ottoni-Wilhelm et al. (2017) conducted an experiment in which participants could donate to a charitable cause:

A research foundation had already provided some amount ($4, $10, $28, $34) to a charity (books for children)
Participants were given either $40 or $46 and could donate any amount to the same charity
Donations were anonymous

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Charitable giving and altruism�

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Charitable giving and social pressure�

DellaVigna et al. (2012) ran an experiment on door-to-door solicitations for charity:

Treatment 1: solicitors approach households in the usual manner
Treatment 2: a flyer notifies households one day in advance about the one-hour time interval in which a solicitor will arrive
Treatment 3: the flyer also includes a box to be checked if the household does not want to be disturbed

Predictions:

If altruism is the main driver of giving, the flyer should increase both the presence at home and giving
If social pressure is the main driver of giving, the flyer should lower both the frequency of opening the door and giving

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Charitable giving and social pressure�

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Charitable giving and social image�

Samek and Sheremeta (2017) conducted a field experiment by randomly assigning 205 subjects into four conditions:

No recognition: all individuals could donate to the Red Cross and donation amounts were publicly displayed
Full recognition: all individuals’ names publicly displayed next to their donations
Positive recognition: the names of the highest two givers publicly displayed next to their donations
Negative recognition: the names of the lowest two givers (or non-givers) publicly displayed

Predictions:

If subjects have no concern about social image, then giving should not change between treatments

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Charitable giving and social image�

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Workplace�

Some facts:

53% of Americans are currently unhappy at work
79% of people who quit their jobs cite “lack of appreciation” as their reason for leaving
89% of bosses believe employees quit because they want more money
Recognition is the number one thing employees say their manager could give them to inspire them to produce great work

What motivates people at the workplace?

Salary (can be explained by the “standard” model)
Relative earnings (how much you make relative to others)
Bonuses (a good contract)
Appreciation

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Workplace�

Office Space:

“Motivation Problems”
https://www.youtube.com/watch?v=cgg9byUy-V4

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Workplace inequality�

Card et al. (2012) examined how people react to inequality of salaries in the workplace:

In 2008, Sacramento Bee (CA newspaper) published the salaries of all University of California employees on a searchable website
Treatment: send email to random subset of UC employees informing them about this website
A few days later: survey all employees about their job satisfaction and intentions to search for another job
Study the effect of learning coworkers’ salaries on one’s own job satisfaction

Predictions:

If employees care only about their own income, this information should not affect their job satisfaction
If employees are inequity averse, they will be affected

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Workplace inequality�

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Workplace contracts�

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Workplace contracts�

Findings:

Bonus contracts are chosen more than 90% of the time, even though such contracts are very flexible and not enforceable
The higher the employee’s effort, the bigger the bonus
Findings can be rationalized by the inequity averse model of other-regarding preferences

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Workplace appreciation�

Kosfeld and Neckermann (2011) designed a field experiment to study how symbolic awards affect worker performance:

A data entry job for two hours, paying $37
Workers were assigned into groups of up to 12 people
Treatment manipulation: in the award treatment, the two best performing workers were selected to receive a congratulatory card (no monetary value)

Predictions:

If workers care about social recognition then offering a symbolic award should increase the total expected effort

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Workplace appreciation�

Findings:

In the control treatment, the average productivity is at 0.22
In the award treatment, the average productivity is at 0.25
Findings provide evidence that workers are motivated not only by monetary incentives but also by social recognition

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Summary�

Models of other-regarding preferences can explain various real-life situations

Why do people give?

Altruism (Ottoni-Wilhelm et al. 2017)
Social pressure (DellaVigna et al. 2012)
Social image (Samek and Sheremeta 2017)

What motivates people in the workplace?

Relative earnings (Card et al. 2012)
Bonuses (Fehr et al. 2007)
Appreciation (Kosfeld and Neckermann 2011)

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References�

Card, D., Mas, A., Moretti, E., & Saez, E. (2012). Inequality at work: The effect of peer salaries on job satisfaction. American Economic Review, 102(6), 2981-3003.
DellaVigna, S., List, J A., & Malmendier, U. (2012). Testing for altruism and social pressure in charitable giving. Quarterly Journal of Economics, 127(1), 1-56.
Dhami, S. (2016). The Foundations of Behavioral Economic Analysis. Oxford University Press.
Fehr, E., Klein, A., & Schmidt, K. M. (2007). Fairness and contract design. Econometrica, 75(1), 121-154.
Kosfeld, M., & Neckermann, S. (2011). Getting more work for nothing? Symbolic awards and worker performance. American Economic Journal: Microeconomics, 3(3), 86-99.
Ottoni-Wilhelm, M., Vesterlund, L., & Xie, H. (2017). Why do people give? Testing pure and impure altruism. American Economic Review, 107(11), 3617-33.
Samek, A., & Sheremeta, R. M. (2017). Selective recognition: How to recognize donors to increase charitable giving. Economic Inquiry, 55(3), 1489-1496.