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University of Auckland Winter Week Lectures Fourth Lecture 5 July 2007

University of Auckland Winter Week Lectures Fourth Lecture 5 July 2007. Associate Professor Ananish Chaudhuri Department of Economics University of Auckland. Recommendations for further reading. Thomas Schelling Micromotives and Macrobehavior The Strategy of Conflict Michael Chwe

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University of Auckland Winter Week Lectures Fourth Lecture 5 July 2007

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  1. University of Auckland Winter Week Lectures Fourth Lecture5 July 2007 Associate Professor Ananish Chaudhuri Department of Economics University of Auckland

  2. Recommendations for further reading • Thomas Schelling • Micromotives and Macrobehavior • The Strategy of Conflict • Michael Chwe • Rational Ritual: Culture, Coordination and Common Knowledge by

  3. Recommendations for further reading • Joseph Henrich et al. (Editors) • Foundations of Human Sociality • Matt Ridley • The Red Queen • The Origins of Virtue • Nature versus Nurture • Genome

  4. Recommendations for further reading • Robert Putnam • Bowling Alone: The Collapse and Revival of American Community • Francis Fukuyama • Trust – The Social Virtues and the Creation of Prosperity

  5. Recommendations for further reading • Robert Frank • Passions within Reason: The Strategic Role of Emotions • Choosing the Right Pond: Human Behavior and the Quest for Status

  6. Recommendations for further reading • Brian Skyrms • The Evolution of the Social Contract • Tim Harford • The Undercover Economist

  7. Other-regarding preferences • The null hypothesis of game theory is the homo economicus assumption of self-interest • But it turns out that in a large majority of cases people exhibit much more nuanced behaviour • Other-regarding preferences • Conditional Cooperation • Fairness • Emotions play a role in economic decisions

  8. Player 1 Player 2 Ultimatum Game Has $10.00 Offer $X, 0 < X < 10? Keep $(10 – X)? Accept? Gets $(10 – X) Gets $X Reject? Gets $0.00 Gets $0.00

  9. Prediction based on self-interest • Player 1 should offer only a small amount to player 2 and player 2 should accept since anything is better than nothing. • Suppose Player 1 is constrained to make offers in whole dollars - then he should offer $1.00 to Player 2 and keep $9.00 • Player 2 should accept this offer since getting $1.00 is better than getting nothing

  10. Dictator Game • Like the ultimatum game but player 2 has no choice so that the proposed allocation is always implemented. • Self-interest prediction: Player 1 should offer only a very small amount to player 2 and player 2 has no choice in this case.

  11. The ultimatum game (Güth, Schmittberger and Schwarze) • Inexperienced subjects • Split DM 4 or DM 10 (multiples of DM 1) • All offers above DM 1 • Modal x = 50 percent (7 of 21 cases) • Mean x = 37 percent

  12. The ultimatum game (Güth, Schmittberger and Schwarze) • A week later (experienced subjects) • All except one offer above DM 1 • 2/21 offer an equal split • Mean offer 32 percent of pie • 5/21 of the offers are rejected

  13. Do higher stakes change the results? • Hoffman, McCabe, Smith (1999): Ultimatum Game with 10$ and 100$ • Offers are not dependent on the size of the cake. • Rejections up to 30$! • Cameron (1995): Ultimatum Game in Indonesia $2.5, $20, $100 (GDP/Person = $670) • The higher the stakes the more offers approach 50/50.

  14. Does altruism explain the high first mover offers? • Forsythe, Horowitz, Savin and Sefton compare offers in the ultimatum game with those in the dictator games. • If player 1 is motivated by altruism alone then offers in the two games should not be different.

  15. Does altruism explain the high first mover offers • Not entirely • But the higher concentration of offers around the equal division in the ultimatum game suggests that behavior cannot be fully attributed to altruism. • Players do take into account the possibility of rejection of unfair offers.

  16. Does bargaining behaviour vary across cultures? • Alvin Roth and colleagues look at behaviour of university students in the ultimatum game played in • Jerusalem (Israel) • Ljubljana (Slovenia) • Pittsburgh (U.S.A.) • Tokyo (Japan)

  17. Does bargaining behaviour vary across cultures? • Looking at modal offers, i.e. offers made by the largest number of participants, they find that • in Pittsburgh and Ljubljana the modal offer is 50% • while in Jerusalem and Tokyo the modal offer is 40%

  18. USA 50% 40% 40% 50% 45%

  19. Does bargaining behaviour vary across cultures? • Moreover while offers are in general lower in Tokyo and Jerusalem, rejection rates are lower in these two countries as well • Thus it seems that the difference is not so much that participants in Tokyo or Jerusalem are “tougher” bargainers but rather perceptions of what constitutes a “fair” offer differ across cultures

  20. Are university students in these four countries all that different culturally? • McArthur Foundation Norms and Preferences Network led by Ernst Fehr, Colin Camerer, Herbert Gintis, Robert Boyd, Samuel Bowles, Joseph Henrich • Look at ultimatum game behaviour in a number of primitive small-scale societies

  21. McArthur Foundation Norms and Preferences Network • 12 experienced field researchers working in 12 countries over 5 continents gathered data for 15 small-scale societies exhibiting a wide variety of economic and cultural conditions • Three foraging societies, six that practice slash-and-burn horticulture, four nomadic herding groups and three sedentary, small-scale agricultural societies

  22. McArthur Foundation Norms and Preferences Network • Mean offers in industrialized societies are typically close to 44%, mean offers in this cross-cultural study range from 26% (Machiguenga) to 58% (Lamalera) • While modal offers in industrialized nations are around 50%, modes in this study vary from 15% to 50%

  23. McArthur Foundation Norms and Preferences Network • In industrial nations offers below 20% are rejected in about 5 out of 10 cases, but rejections in these small-scale societies are extremely rare among some groups

  24. McArthur Foundation Norms and Preferences Network • The large variations across the different cultural groups suggest that preferences or expectations are affected by group-specific conditions, such as social institutions or cultural fairness norms

  25. Two important factors that affect offers and rejections • Payoff to cooperation • How important and how large is a group’s payoff from cooperation in economic production • Machiguenga, who are entirely economically independent and rarely engage in productive activities that involve others besides family members, make very low offers • Lamalera whale hunters, who go to sea in large canoes manned by a dozen or more individuals requiring close cooperation between them, make more generous offers

  26. Two important factors that affect offers and rejections • Market Integration • How much do people rely on market interaction in their daily lives • Those who engage in greater interaction make more generous offers in the ultimatum game

  27. McArthur Foundation Norms and Preferences Network • Plausible explanation of this behaviour • when faced with a novel situation (the experiment), the participants looked for analogues in their daily experience asking “What familiar situation is this game like?” • then acted in a manner appropriate for that situation

  28. Questions?

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