When Foul Play Seems Fair: Meritocratic (Un)Fairness and ( Dis )Honesty

1. When Foul Play Seems Fair: Meritocratic (Un)Fairness and (Dis)Honesty Fabio Galeotti (University of East Anglia) Reuben Kline (Stony Brook University) Raimondello Orsini (University of Bologna) Lorentz Center, NorMAS Workshop 2013

2. Belief in a Just World and Redistribution • Belief in a Just World (BJW) is the belief that deserving people are rewarded and undeserving people are punished. Under BJW, salient injustice causes a type of cognitive dissonance which one resolves through rationalization or action. • BJW (partly) explains cross-national (US vs. West Europe) variation in degrees of re-distribution: those who are more likely to believe that income is a result of “luck and connections” are more likely to support redistribution (Alesina & Angeletos, 2005). • Early adolescents begin to develop a sense of fair inequality; younger children tend to be strict egalitarians (Almas et al., 2010)

3. Inequality, Inequity and Dishonesty • Inequality in many cases is often confounded by inequity (unfairness). Inequality can in principle be fair or unfair. Under BJW, unfairness might trigger a redistributive reaction. • Our argument is that if the income distribution is considered to be unfair, citizens are more likely to view circumvention of the “rules of the game” – that is dishonesty and corruption - as justified. Meritocratic fairness  honesty Meritocratic unfairness  dishonesty

4. Related Literature • In Hoffman et al. (1994), subjects earn right (quiz performance) to be proposer in ultimatum game. • Zizzo (2003) “Inequality and procedural fairness in a money burning and stealing experiment”. • Almas et al. (2010) modified dictator game in which endowment is earned through an effort task • Rustrom & Williams (2000), investigate preferences for redistribution after earning money in a “Tower of Hanoi task” (meant to differentiate effort and productivity) • Konow et al. (1996, 2000, 2005 etc) origin of endowment and PGG contribution, “accountability principle • Ruffle (1997): exogenous (coin flip) vs. endogenous (skill-testing contest) endowments in dictator and ultimatum games

5. Experimental Details • Experimental sessions: • University of Bologna, Forlí Campus (June, 2011 and February 2013): 164 subjects • Stony Brook University, NY (April and November, 2012): 144 subjects • Average payments: about €11.50 at Forlí and about $17 at SBU • Computerized experiment (z-Tree) • Duration: 30-40 minutes

6. Experimental Design • Three stages: • Stage 1: Real-effort task to measure performance/effort and assign initial endowments • Stage 2: Dishonesty stage (in pairs) • Stage 3: Real-effort task as in Stage 1 • Between-subjects manipulation of initial endowments’ allocation and pairing:

7. Stage 1: Real-effort task • Real-effort task: counting the occurrences of letters “e” and “c” in each line of a text in German • A tedious task intended to elicit a sense of “property rights” over performance

8. Stage 1: effort and payoff • Subjects were instructed that: • At the end of the task, they will be divided into two groups, high performers and low performers, based on median performance; • their performance on the quiz will determine their initial endowment: • 3 out of 4 scenarios: Endowment (high performer) ≥ Endowment (low performer) • 1 out of 4 scenarios: Endowment (low performer) ≥ Endowment (high performer)

9. Treatment EE: Equal & Equitable • Equal: Both high and low performers get the same payment • Equitable: In the following stage, subjects will be paired high-high and low-low (randomly) • Thus, the income distribution is both equal and equitable because all subjects are compensated equally and performed the same • Control for income effects: two sub-treatments: • EE high: • High performers receive $10 (€7) and low performers receive $10 (€7) • EE low: • High performers receive $3 (€2) and low performers receive $3 (€2)

10. Treatment EI: Equal & Inequitable • Equal: Both high and low performers get the same payment • Inequitable: In the following stage, subjects are paired high-low (randomly) • Thus, the income distribution, while equal, is arguably inequitable because the high performers receive compensation equivalent to the low performers, despite they know that their performance was higher • Control for income effects: two sub-treatments: • EI high: • high performers receive $10(€7) and low performers receive $10(€7) • EI low: • high performers receive $3(€2) and low performers receive $3(€2)

11. Treatment UI: Unequal & Inequitable • High performers receive $3 (€2) and low performers receive $10 (€7) • Subjects are paired high-low (randomly) • Thus, the income distribution is both unequal and inequitable

12. Treatment UE: Unequal & Equitable • High performers receive $10 (€7) and low performers receive $3 (€2) • Subjects are paired high-low (randomly) • Thus, the income distribution, while unequal, is arguably equitable because the high performers receive greater compensation for their performance

13. Stage 2: Dishonesty stage • Additional payment. Within each pair: • Participant A: • Owner of “escrow” account of $15 (€10) • Participant B: • Custodian of the account

14. Stage 2: Private Signals and Misrepresentation • The custodian receives a series of 25 binary signals • The signals are generated from a (symmetric) binomial distribution • Each signal is either red or green, but known only privately to each custodian • Each signal is meant to direct the custodian as to whether to transfer an amount, $0.60 (0.40€) to herself (green) or leave it for the owner of the account (red) • It is the recording of the signal that affects payoffs, not the signal itself - therefore the custodian can potentially misrepresent the signal • Practice rounds with forced input to learn the rules

15. Dishonesty task

16. Behavioural hypotheses • Procedural unfairness induces more dishonesty: UI > UE 2) Stronger effect in USA than in Italy, since American subjects should be more sensitive to meritocracy (WVS) • Dishonesty in US: UI ≥ EI > EE ≈ UE • Dishonesty in Italy: UI > EI ≈ EE ≈ UE

17. Results: rate of honesty (No difference between EE high (EI high) and EE low (EI low)  we pool the data) • In aggregate, American subjects were more honest than Italian (Mann-Whitney p = 0.026)  mainly driven by EE and UE treatments

18. Two Types of Misrepresentation • negative dishonesty: reporting a signal as green when it is in fact red • positive dishonesty: reporting a signal as red when it is in fact green • as expected, we find much more negative dishonesty than positive dishonesty

19. Results: negative dishonesty • In aggregate, no difference between Italy and US

20. Results: positive dishonesty • In aggregate, US > Italy (p = 0.027)

21. Results: custodian’s earnings • Italy: no difference across treatments

22. Random Effects Logit (Italy and US) • Dependent variable: public signal (1 = red, 0 = green)

23. To sum up • We observe statistically significant differences between the Italian and the American sample • In the US, dishonesty is triggered mainly by perceived inequity/unfairness • In Italy dishonesty is higher on average, but is almost unrelated to equity/fairness

24. Meritocracy and honesty: Survey Evidence • Data used from the World Values Survey across three waves • Dependent variable(s): on a scale of 1-10, how justifiable is: • cheating on one’s taxes if you have the chance • accepting a bribe in the course of your duties • Chief explanatory variable is, on scale of 1-10: • 1: “In the long run, hard work usually brings a better life.” • 10: “Hard work does not generally bring success – it is more a matter of luck and connections.”

25. Multi-level model: results • Greater degrees of (perceived) inequity and inequality (at the national level) are associated with a greater willingness to circumvent micro-level rules (accept bribes, cheat on taxes), even when controlling for income and corruption at the national level • This observational study shows that these factors are associated with one another • Our experimental results show that in the lab (and especially in the US) the inequity of the income distribution is associated with a greater degree of dishonesty, even when holding constant the inequality of the distribution.

26. Random Effects Logit (All) • Dependent variable: public signal (1 = red, 0 = green)

27. Thanks for your attention