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Models 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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The “standard” model�

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Problems with the “standard” model�

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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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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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Models of Other-Regarding Preferences

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The inequity aversion model�

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The inequity aversion model�

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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�

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Makes me feel good!

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The intension-based model�

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Care about the action of the other individual!

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Axiomatic foundation�

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Testing the models�

  • Frans de Waal’s TED Talk:

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Testing the models: Test 1�

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Testing the models: Test 1�

  • Results of the experiment by Engelmann and Strobel (2004):
    • Neither the ERC model nor the inequity aversion model can explain the data
    • The efficiency concern model and the maximin preferences have better predictive power

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Testing the models: Test 2�

  • Chowdhury and Jeon (2014) use an experiment to test:
    • The inequity aversion model
    • The ERC model
    • The impure altruism model

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  • Experimental design:
    • A simple dictator game
    • Proposer and Responder receive an endowment (0, 5, 10, 15, 20)
    • Proposer receives an additional 10 and makes an offer to Responder

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  • What happens to the offer as the endowment increases?
    • The inequity aversion model: does not change
    • The ERC model: decreases
    • The impure altruism model: increases

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Testing the models: Test 2�

  • Results of the experiment by Chowdhury and Jeon (2014):
    • As the endowment increases, the average offer increases
    • This is most consistent with the impure altruism model

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Testing the models: Test 3�

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Testing the models: Test 3�

  • Results of the experiment by Cox (2004):
    • The average amount invested in Treatment 1 is $5.97, and the average amount returned is $4.94
    • The average amount invested in Treatment 2 is $5.97, and the average amount returned is $2.06
    • This is consistent only with the intention-based model, and not with the outcome-based models (inequity aversion, ERC, efficiency concern)

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Summary�

  • Five models of other-regarding preferences are:
    • The inequity aversion model (outcome-based)
    • The ERC model (outcome-based)
    • The efficiency concern model (outcome-based)
    • The impure altruism model (intention-based)
    • The intension-based model (intention-based)

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  • Both outcome-based and intention-based models play an important role in explaining the actual behavior of economic agents

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References�

  • Andreoni, J. (1989). Giving with impure altruism: Applications to charity and Ricardian equivalence. Journal of Political Economy, 97(6), 1447-1458.
  • Bolton, G.E., & Ockenfels, A. (2000). ERC: A theory of equity, reciprocity, and competition. American Economic Review, 90(1), 166-193.
  • Charness, G., & Rabin, M. (2002). Understanding social preferences with simple tests. Quarterly Journal of Economics, 117(3), 817-869.
  • Chowdhury, S.M., & Jeon, J.Y. (2014). Impure altruism or inequality aversion?: An experimental investigation based on income effects. Journal of Public Economics, 118, 143-150.
  • Cox, J.C. (2004). How to identify trust and reciprocity. Games and Economic Behavior, 46(2), 260-281.
  • Engelmann, D., & Strobel, M. (2004). Inequality aversion, efficiency, and maximin preferences in simple distribution experiments. American Economic Review, 94(4), 857-869.
  • Fehr, E., & Schmidt, K. M. (1999). A theory of fairness, competition, and cooperation. Quarterly Journal of Economics, 114(3), 817-868.
  • Neilson, W. S. (2006). Axiomatic reference-dependence in behavior toward others and toward risk. Economic Theory, 28(3), 681-692.
  • Rabin, M. (1993). Incorporating fairness into game theory and economics. American Economic Review, 83(5), 1281-1302.
  • Segal, U., & Sobel, J. (2007). Tit for tat: Foundations of preferences for reciprocity in strategic settings. Journal of Economic Theory, 136(1), 197-216.

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