TRUST, FEAR, RECIPROCITY, AND ALTRUISM: Theory and Experiment

1. TRUST, FEAR, RECIPROCITY, AND ALTRUISM: Theory and Experiment James C. Cox University of Arizona and Indiana University

2. Central Objective of the Research Improve theory through a program of: • Experimental testing; and • Theoretical modeling motivated by data

3. Implications of Parsimony Design experiments to identify: • When the “economic man” model does not predict well … and models of “other-regarding” preferences are needed • When the other-regarding preferences need to include beliefs and intentions

4. Parsimony (cont.) Develop an integrated approach to modeling behavior that is: • Unconditional on intentions; or • Conditional on others’ revealed intentions

5. Contents • Experimental designs that discriminate among unconditional altruism, positive reciprocity, trust, negative reciprocity, and fear • Effects of social distance and decision context on reciprocal behavior

6. Contents (cont.) • Direct tests of alternative models • New models of patterns of behavior that: (a) are conditional; or (b) are not conditional on others’ intentions and status

7. An Example: The Investment Game • Subjects are paired • Each subject in each pair is given $10 • Second movers are told to keep their $10 • First movers can either: • Keep their $10; or • Give some or all of it to the second mover • Any amount given is multiplied by 3 by the experimenter

8. Investment Game (cont.) • Second movers can either: • Keep all of any amount received; or • Return part or all of it to the first mover • All of the above is common information given to all subjects • The game is played only once

9. Predictions ofthe “Economic Man” Model • Since second movers care only about their own material gain, they will keep any tripled amount sent by first movers • Since first movers care only about their own material gain, and know that second movers have the same kind of preferences, first movers send nothing

10. Predictions (cont.) • Zero returned and sent is the subgame perfect equilibrium of this game, given the economic man assumption about preferences • The predicted outcome is inefficient: Each subject pair is predicted to get $20 in payoff … just the endowment … when it could have gotten as much as $40

11. Behavior in the Investment Game

12. Definitions • Self-regarding (or “economic man”) preferences are characterized by positively monotonic utility for one’s own material payoffs and indifference about others’ material payoffs • Other-regarding preferences are characterized by utility that is not constant with respect to variations in one’s own or others’ material payoffs • Altruistic preferences arecharacterized by utility that is monotonically increasing in others’ material payoffs and one’s own payoffs

13. Definitions (cont.) • (direct) Positive reciprocity is a motivation to adopt a generous action that benefits someone else, at one’s own material cost, because that person’s intentional behavior was perceived to be beneficial to oneself • Trust is a belief that one agent has about another. A trusting action is one that creates the possibility of mutual benefit and the risk of loss of one’s own utility if the other person defects

14. Definitions (cont.) • (direct) Negative reciprocity is a motivation to adopt an action that harms someone else, at one’s own material cost, because that person’s intentional behavior was perceived to be harmful to oneself • Fear is a belief that one agent has about another. An action that is fearful of another is one that forgoes an otherwise preferred action because of a belief that the other agent will inflict costly punishment as a response to choice of the otherwise-preferred action

15. Investment Game Triadic Design Treatment A is the investment game Treatment B is a dictator game that gives dictators the same choices that first movers have in the investment game Treatment C is a dictator game that gives dictators the same choices that second movers have in the investment game

16. Comparison of the Amounts Sent in Treatments A and B

17. Comparison of the Amounts “Returned” in Treatments A and C

18. Conclusions about Behavior • Behavior in the investment game is known to exhibit trust because first movers send significantly more in the investment game than in the first-mover dictator control treatment • Behavior in the investment game is known to exhibit positive reciprocity because second movers return significantly more in the investment game than in the second-mover dictator control treatment

19. Implications for Theory • Data-consistent models of first-mover behavior in the investment game must incorporate beliefs about others’ behavior • Data-consistent models of second-mover behavior in the investment game must incorporate others’ intentions

20. Conclusions from Many Other Experiments with Game Triads • Positive reciprocity is significant in the moonlighting game but negative reciprocity is not significant • Trust is significant in the moonlighting game but fear is not significant • Positive reciprocity is significant in the trust game with a single blind protocol but not with a double blind protocol • Positive reciprocity in the trust game is invariant with a doubling of money payoffs

21. Conclusions from Triads (cont.) • Negative reciprocity and fear are not significant in the punishment mini-ultimatum game (MUG) • Play in the punishment MUG is invariant with framing the task as market exchange • Negative reciprocity is significant in the punishment MUG if it is embedded within a context of similar games

22. Conclusions from Triads (cont.) • Females are less positively reciprocal in the investment game than are males • Groups are less generous in the investment game than are individuals

23. Models of Other-regarding Preferences • Inequality aversion models (Fehr & Schmidt, QJE, 1999; Bolton & Ockenfels, AER, 2000): utility is increasing with one’s own money payoff but decreasing with the difference between one’s own and others’ money payoffs • Quasi-maximin model (Charness & Rabin, QJE, 2003): utility is increasing with an agent’s own money payoff, with the lowest of all agents’ payoffs, and with the total of all agents’ payoffs

24. Alternative Model Motivated by Data Egocentric altruism model (Cox & Sadiraj): other-regarding preferences characterized by monotonicity, convexity, and egocentricity

25. Exp.1: A Direct Test of Inequality Aversion This test is provided by the first-mover dictator control treatment for the investment game triad: • The dictator is given $10 • The anonymously-paired subject is given $10 • The dictator can keep all of his $10 or give any integral part of it to the paired person • Any amount given is tripled by the experimenter

26. Prediction of the Fehr-Schmidt Model

27. Prediction of the Bolton-Ockenfels Model

28. Behavior in Experiment 1

29. Behavior in Experiment 1 (cont.) • 19 of 30 or 63% of the dictators gave positive amounts to the other person. • The average amount given was $3.63 • The average payoff of dictators was $6.37 and the average payoff of non-dictators was $20.89

30. The Quasi-Maximin Model

31. Direct Tests of Quasi-Maximin Experiment 2 my1y2y3 10 0 6 6 10 0 15 15 10 0 2 33

32. Direct Tests of Quasi-Maximin (cont.) Experiment 3 my1y2y3 10 0 15 15 10 3 12 15 10 4 5 21

33. Subjects’ Choices in Experiments 2 and 3

34. Behavior in Experiments 2 and 3 (cont.) • The choices of 85% of the subjects in experiment 2 are inconsistent with quasi-maximin preferences • The choices of 94% of the subjects in experiment 3 are inconsistent with quasi-maximin preferences

35. More Information about Subjects’ Preferences • Experiment 4 differs from experiment 1 only by introduction of the opportunity to take money as well as give it • Amounts given are multiplied by 3 • Amounts taken are not transformed • Amounts taken cannot exceed 5 (first-mover control for the moonlighting triad)

36. Choices in Experiments 1 and 4

37. Behavior Changes Character when the Feasible Set Changes • In experiment 1, 67% of dictators gave money to others who would, as a result, have significantly higher payoffs than the dictators • In experiment 4, 70% of dictators took money from the others who would, as a result, have significantly lower payoffs than the dictators • How can such behavior be explained?

38. With a Model of Egocentric Altruistic Preferences

39. The Two-Agent Egocentric Altruism Model

40. Properties of the Model • Monotonicity • Convexity • Egocentricity Two Agent Special Case of Egocentricity: for all

41. Consistency with Data The egocentric altruism model is consistent with data for: • 100% of subjects in experiments 1 and 4 • 85% of subjects in experiment 2 • 88% of subjects in experiment 3

42. The Model is Robust The model can also rationalize behavior in experiments with: • Proposer competition • Responder competition • Voluntary contributions to public goods

43. Incorporating Intentionsin a Tractable Way Note that MRS = = WTP = 1/MRS at an allocation on the 45° linewhere m = y Convexity implies higher WTP if and lower WTP if

44. Reciprocity and Status We assume where: • r is a “reciprocity variable” • s is a “status variable”

45. Definition of r • where m(x) is the max. payoff for the second mover, given the first mover’s choice x • and is m(x) when x is neutral

46. Definition of s where and are the status of the first and second movers in the context of the game currently played

47. Assumptions Used in Estimation • A.1 Individuals choose so as to maximize a utility function of the given form • A.2 The emotional state function (r, s)is identical across individuals and there is a zero-mean idiosyncratic term such that:

48. Model Assumption that is Tested • A.3(r, s) is weakly increasing in r and s

49. Data Used in Estimating the Model • Dictator games, with and without a status treatment • Stackelberg duopoly games • Mini-ultimatum games with variable reference payoff conditions • Ultimatum games with random and earned entitlements to be first mover • Moonlighting games

50. Summary Conclusions from Estimation • The model captures baseline altruism in dictator games • The model explains how status affects altruism in dictator games • The model explains reciprocal responses in Stackelberg duopoly games