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Interdependent Preference Models as a Theory of Intentions
Abstract
We provide a preference framework for situations in which "intentions matter." A behavioral type describes the individual's observable characteristics and the individual's personality. We define a canonical behavioral type space and provide a condition that identifies collections of behavioral types that are equivalent to components of the canonical type space. We also develop a reciprocity model within our framework and show how it enables us to distinguish between strategic (or instrumental) generosity and true generosity.
... For example, in a leading paper Levine [23] (henceforth Levine) takes this approach to analyze experimental evidence in ultimatum, centipede, and public goods experiments. Gul and Pesendorfer [18] lay the foundations of interdependence between behavioral types, inde-pendent of the environment that decision-makers interact. ...
... 17 The denominator thus serves as a normalization, and will always be (1 − γ)B = 15. 18 Finally, α captures the measure of subjects' blame-sensitivity. The objective of the subject in stage 2 is to choose a vector of punishments, k j 's, to maximize his utility. ...
... For a more general approach we refer the reader to Gul and Pesendorfer[18]. ...
The theory of reciprocity is predicated on the assumption that people are willing to reward kind acts and to punish unkind ones. This assumption raises the question of what kindness is. In this paper, we offer a novel definition of kindness based on a notion of blame. This notion states that for player j to judge whether or not player i is kind to him, player j has to put himself in the position of player i, and ask if he would act in a manner that is worse than what he believes player i does. If player j would act in a worse manner than player i, then we say that player j does not blame player i. If, however, player j would be nicer than player i, then we say that player j blames player i. We believe this notion is a natural, intuitive and empirically functional way to explain the motives of people engaging in reciprocal behavior. After developing the conceptual framework, we test this concept by using data from two laboratory experiments and find significant support for the theory.
... The utility agents derive from the environmental consumption depends on the kind of (pro-or anti-ecologist) agent one randomly meets when sharing the same consumption, and thus on the (positive or negative) externalities such a meeting may produce. In the words of Gul and Pesendorfer (2016) and Bergemann et al. (2017), agents have interdependent preferences. Similarly to the former work, we assume that each agent may recognise with certainty the type of agent she encounters, whereas Bergemann et al. (2017) assume that each agent's type is not explicit and agents base their expectations according to their beliefs. ...
... Similarly to the former work, we assume that each agent may recognise with certainty the type of agent she encounters, whereas Bergemann et al. (2017) assume that each agent's type is not explicit and agents base their expectations according to their beliefs. In our work agents are not concerned with the intentions underlying the behaviour of others, i.e. they decide what to do according to the behaviour of the agent they are paired with, not according to the whole preference set of the latter (see Falk et al., 2008;Gul and Pesendorfer, 2016, for examples of works investigating intentions). ...
... Note that this preference ordering is similar to the one of the Ecologist, with the difference that (N P, P ) is now the least preferred outcome. The three types identified so far are analogous to the ones considered by Gul and Pesendorfer (2016), who defined them respectively as Generous, Spiteful, and Conditionally Generous. We expand on the variety of types by including the following two characterizations. ...
The introduction of an environmental policy to foster a virtuous behaviour does not automatically establish a social norm within a population, i.e. it might not be socially accepted and enforced. Some agents feel compelled to abide to the environmental social norm and embrace it, while other agents do not. Some might want to imitate their peers, while others might prefer not to conform and play the maverick role. In this model we describe this heterogeneity of preferences by proposing a taxonomy of five possible types of agents that enriches the traditional triplet presented in the literature. We then employ a random matching model to study how a social norm spreads across the population when its composition changes. By considering three relevant population compositions (scenarios), we show that what is most important for the successful diffusion of social norms is not whether agents abide to it or not, but why. Declaration of Interest: none.
... For example, it is unclear how type-based models, i.e. Levine (1998) or Gul and Pesendorfer (2016), could explain player 2's response. Whenever it is optimal for player 1 to cooperate in both games, player 2's belief about 1's type must be the same. ...
... It would represent a similar mechanism to the one put forward by Rotemberg (2008) for altruism. In this regard, the extension would adopt ideas from the literature of typebased reciprocity, Levine (1998), Ellingsen and Johannesson (2008) and Gul and Pesendorfer (2016). While these models can often be simpler to solve, it is unclear how they could explain the behavior in Orhun (2018). ...
... Von Siemens (2013) In contrast to type-based models, intention-based reciprocity such as Rabin (1993) and Dufwenberg and Kirchsteiger (2004) requires more care when moving from complete to incomplete information. Type-based models assume heterogeneity in people's level of altruism and model reciprocity by assuming that people care more about those who are more altruistic (Levine (1998), Gul and Pesendorfer (2016)). 1 In this type of models, generous actions are rewarded because they signal a high level of altruism. Adding private information about material payoffs simply adds another dimension to such signalling games. 2 Intention-based models, instead, rely on an endogenous reference point to model kindness. ...
This thesis contains two theoretical essays on reciprocity and one that analyzes the effects of perception biases on learning and decision-making. In the first chapter, I propose a new theory of intention-based reciprocity that addresses the question of when a mutually beneficial action is kind. When both benefit from the action, a player’s motive is unclear: he may be perceived as kind for improving the other player’s payoff, or as self-interested and not-kind for improving his own. I use trust as an intuitive mechanism to solve this ambiguity. Whenever a player puts himself in a vulnerable position by taking such an action, he can be perceived as kind. In contrast, if this action makes him better off than his alternative actions do, even if it is met by the most selfish response, he cannot be kind. My model explains why papers in the literature fail to find (much) positive reciprocity when players can reward and punish. The second chapter extends my theory of reciprocity to incomplete information. I outline how reciprocity can give rise to pay-what-you-want pricing schemes. In the classic bilateral trade setting, I show that sequential interactions can be more efficient than normal form mechanisms when some people are motivated by reciprocity. Reciprocity creates incentives for information sharing. The last chapter is co-authored with Manuel Staab. We study the effects of perception biases and incorrect priors on learning behavior, and the welfare ranking of information experiments. We find that both types of biases by themselves reduce expected utility in a model where payoff relevant actions also generate informative signals, i.e. when actions constitute information experiments. However, experiments can be affected to different degrees by these biases. We provide necessary and sufficient conditions for when any binary ranking of action profiles can be reversed. Building on these findings, we show that an agent can be better off suffering from both biases rather than just one.
... Models of type-based reciprocity (Levine 1998;Strassmair 2009;Gul and Pesendorfer 2016) assume that people are either selfish or altruistic. The selfish type always cares only about self-interest, while the altruistic type also cares about other individuals' welfare. ...
This paper studies how in-group social connections affect outsiders’ pro-social behavior towards group members. We employ an indirect investment game, in which a recipient of a good deed has to return to a beneficiary, instead of the original donor. We introduce the naturally-occurring social connections between the donor and the beneficiary, and show that such connections increase the recipients’ transfer to a beneficiary by 42% when the donor’s transfer is above average. The spillover does not function through the signaling of the donor’s expectations, and altruism with an endogenous reference group explains our results well.
... We hypothesize that " type preferences " introduced by Gul and Pesendorfer (2010) was a contributing motive for gratitude. There has been prior work on altruistic types. ...
Recent and accumulating evidence has established that though people are not completely selfish, they are not as altruistic as might have been suggested by prior experimental results. These papers found decreased giving if the experiment was double-blind, or allowed “silently exiting”. Evidence for positive reciprocity, where subjects give more than dictators with the same endowment, has always been rare. However, Lin and Ong 2011 found significant positive reciprocity in a double-blind trust game which the 2nd player knew that the 1st player was unaware of the possibility of reciprocation. Furthermore, though 2nd players could silently exit, none did. We investigated the possibility that 1st players’ could better signal their “altruism type” in their setup, as suggested by the theory of type preferences of Gul and Pesendorfer (2011). To test this, we introduced a 3rd player into Lin and Ong’s setup, again unknown to the 1st player, who could give part of a now exogenously fixed endowment to the 1st player after observing 1st player giving to the 2nd player. We found that 3rd players’ giving to 1st players’ was significantly correlated with 1st players’ giving to the 2nd players, and not significantly correlated with endowment. Furthermore, our exogenous endowment allowed us to show that this result was not consistent with 1st players exerting social influence on 3rd players. Unlike prior studies, we evinced that the explicitness of double-blindness with silent exiting made a difference only for the lowest level of endowment. Our result supports prior results which showed that player characteristics, like their facial features, can be predictors of behavior. However, to our knowledge, our study is the first to identify the apparent altruism type of the recipient as the stimulus for giving to them.
... when employees infer that their manager or the organization cares about their wellbeing, they reciprocate with increased commitment, loyalty, and performance (see, for example, the reviews by Rhoades andEisenberger 2002 andCropanzano andMitchell 2005). As pointed out by Gul and Pesendorfer (2010), this approach facilitates analysis and allows to distinguish between genuine kindness and instrumental kindness. ...
Economen benadrukken traditioneel het belang van financiële prikkels voor arbeidsmotivatie. De laatste jaren is er ook aandacht voor andere relevante motieven. Een van deze motieven is reciprociteit, wat betekent dat mensen vijandige en vriendelijke daden op overeenkomstige wijze beantwoorden. Reciprociteit impliceert dat werknemers bereid zijn een stapje harder te lopen wanneer werkgevers laten blijken dat ze om hun personeel geven. Het eerste gedeelte van dit proefschrift bestudeert theoretisch de interactie tussen financiële prikkels en de reciprociteit van werknemers.
Ter illustratie, ik bepaal de optimale combinatie van vast loon en prestatieloon wanneer werknemers reciproque zijn. Daarnaast leid ik af dat wanneer werknemers gevoelig zijn voor de aandacht en erkenning van hun werkgever, het aantrekkelijker is om werknemers te motiveren door ze een promotie in het vooruitzicht te stellen, dan door ze individueel prestatieloon te geven. Analyse van GSOEP data laat zien dat er een positieve correlatie is tussen de mate waarin iemand reciproque is en de kans dat hij een promotie in het vooruitzicht heeft. Het tweede deel van het proefschrift beschrijft twee veldexperimenten die in een Nederlandse winkelketen uitgevoerd zijn. Beide experimenten testen voorspellingen van toernooitheorie. Het eerste experiment test hoe tussentijdse feedback de navolgende prestaties beïnvloedt. Het tweede experiment test voorspellingen over de invloed van ruis in de prestatiemaatstaf en de verdeling van prijzengeld in een eliminatietoernooi over twee ronden. Onze bevindingen komen grotendeels overeen met de voorspellingen.
... However, we allow for dependence of each v i on the entire profile θ ∈ . With this, we are also able to consider models of interdependent preferences as in Gul and Pesendorfer (2016). 30 For simplicity, we will always consider the implied utility function defined over terminal histories and personal features ...
We consider multi-stage games with incomplete information, and we analyze strategic reasoning by means of epistemic events within a “total” state space made of all the profiles of behaviors (paths of play) and possibly incoherent infinite hierarchies of conditional beliefs. Thus, we do not rely on types structures, or similar epistemic models. Subjective rationality is defined by the conjunction of coherence of belief hierarchies, rational planning, and consistency between plan and on-path behavior. Since consistent hierarchies uniquely induce beliefs about behavior and belief hierarchies of others, we can define rationality and common strong belief in rationality, and analyze their behavioral and low-order beliefs implications, which are characterized by strong rationalizability. Our approach allows to extend known techniques to the epistemic analysis of psychological games where the utilities of outcomes depend on beliefs of order k or lower. This covers almost all applications of psychological game theory.
... In an extension to a simultaneous game with mutual reciprocity, he also obtains gift-exchange equilibria. Arbak and Kranich (2005) and Non (2012) are signalling models (Levine 1998) where preferences are assumed to be conditional on the type of the opponent (Gul and Pesendorfer 2010). In these models, the existence of some firms with social preferences might enable other firms to imitate and profit from strategic kindness. ...
This paper explores the limitations of intention-based social preferences as an explanation of gift-exchange between a firm and a worker. In a framework with one self-interested and one reciprocal player, gift-giving never arises in equilibrium. Instead, any equilibrium in a large class of multistage games must involve mutually unkind behavior of both players. Besides gift-exchange, this class of games also includes moral hazard models and the rotten kid framework. Even though equilibrium behavior may appear positively reciprocal in some of these games, the self-interested player never benefits from reciprocity. We discuss the relation of these results to the theoretical and empirical literature on gift-exchange in employment relations.
... While critically analysing the functions and information input syntax, the information architecture and the possible probabilistic risk can moderated in the reciprocating dependency models. In the reciprocating dependency model the flow of information is complex and involves the operations and control (Gul, 2010). Operations and control is the centre of business where input from the every source centralised and worked on. ...
The E Supply Chain Management is the optimised sector of twenty first century, where the process is potentially dependant on the flow of information. As the width and breadths of e supply chain operations enlarge in their size of global corporate, the complexities of information networking and communication equally becomes bigger and deep. Since the supply chain operation is the leverage between internal and external operations of any enterprise or a business, any defect in maintaining the internal information structure of organisation causes the undesirable outputs in external operation and thus on the global progression of the business. The proposed assessment is the keen look to the internal information structure of the organisation, Milestar UK Ltd. The research is conceptualised about the architecture of information systems and its relation to the effectiveness of e supply chain functions. Direct and indirect effects of sharing of information, flow of information and the networking of information on the major and sub functions of e supply chain like, demand planning, decision making and warehousing is illustrated in the proposed research. Since the research is demonstrated on the large volume data, with the prominent small samples, the results can be optimised. The statistical analysis of information sharing database and the direct e supply chain functions is the practice often practiced by the employees. However the research prospective of these practices is newly adopted in this assessment. To achieve the transparency of research quantitative method of statistical analysis if performed on the data bases provided by the company Milestar UK Ltd. Corresponding results are ethically explained and tested to procure the possible recommendation to the company. The methods used in the assessment are proven by the management research and it is hoped it will add values on test bench.
We examine cooperative behavior when large sums of money are at stake, using data from the TV game show “Golden Balls.” At the end of each episode, contestants play a variant on the classic Prisoner’s Dilemma for large and widely ranging stakes averaging over $20,000. Cooperation is surprisingly high for amounts that would normally be considered consequential but look tiny in their current context, what we call a “big peanuts” phenomenon. Utilizing the prior interaction among contestants, we find evidence that people have reciprocal preferences. Surprisingly, there is little support for conditional cooperation in our sample. That is, players do not seem to be more likely to cooperate if their opponent might be expected to cooperate. Further, we replicate earlier findings that males are less cooperative than females, but this gender effect reverses for older contestants because men become increasingly cooperative as their age increases.
This paper asks whether gift exchange generates externalities for people outside of the bilateral relationship between the gift giver and recipient, and whether the nature of this relationship is affected by social networks. We examine this question in the context of a field experiment in urban Chinese hospital outpatient clinics. We first show that when patients give a small gift, doctors reciprocate with better service and a fewer unnecessary prescriptions of antibiotics. We then show that gift giving creates externalities for third parties. If two patients, A and B are perceived as unrelated, B receives worse care when A gives a gift. However, if A identifies B as a friend, then both A and B benefit from A's gift giving. Hence, we show that gift giving can create positive or negative externalities, depending on the giver's social distance to the third party.
We prove that a universal preference type space exists under more general conditions than those postulated by Epstein and Wang (1996). To wit, it suffices that preferences can be encoded monotonically in rich enough ways by collections of continuous, monotone real-valued functionals over acts, which determine-even in discontinuous fashion-the preferences over limit acts. The proof relies on a generalization of the method developed by Heifetz and Samet (1998a).
We study agents whose expected utility preferences are interdependent for informational or psychological reasons. We characterize when two types can be “strategically distinguished” in the sense that they are guaranteed to behave differently in some finite mechanism. We show that two types are strategically distinguishable if and only if they have different hierarchies of interdependent preferences. The same characterization applies for rationalizability, equilibrium, and any interim solution concept in between. Our results generalize and unify results of Abreu and Matsushima (1992), who characterize strategic distinguishability on fixed finite type spaces, and Dekel et al. (2006, 2007), who characterize strategic distinguishability without interdependent preferences.
We experimentally investigate behavior and beliefs in a sequential prisoner’s dilemma. Each subject had to choose an action as first-mover and a conditional action as second-mover. All subjects also had to state their beliefs about others’ second-mover choices. We find that subjects’ beliefs about others’ choices are fairly accurate on average. Using the elicited beliefs, we compare the explanatory power of a few current models of social and moral preferences. The data show clear differences in explanatory power between the preference models, both without and with control for the number of free parameters. The best-performing models explain about 80% of observed behavior. We use the estimated preference parameters to identify biases in subjects’ expectations. We find a consensus bias (whereby subjects believe others behave like themselves) and a certain optimism (whereby subjects overestimate probabilities for favorable outcomes), the former being about twice as strong as the second.
La perception dominante de l’entrepreneuriat, notamment dans les pays développés, est celle d’une activité risquée, dynamique et entreprise volontairement par une certaine catégorie d’individus – des « superstars » - afin de bénéficier d’opportunités de gains et une influence sociale plus importante. Cependant, ce point de vue dynamique de l’entrepreneuriat contraste avec celui généralement présenté dans les pays en développement où l’emploi indépendant est en grande partie exercé dans le secteur informel ; un segment considéré « précaire » du marché du travail et permettant uniquement à l’individu d’échapper au chômage. Néanmoins de plus en plus d’études, en Afrique et davantage en Amérique Latine, montrent que ce segment est désirable et susceptible de procurer à certains individus, notamment aux entrepreneurs, des revenus plus compétitifs que ceux travaillant dans la sphère formelle.De ce fait, la première partie de cette thèse s’intéresse à l’entrée des individus dans l’entrepreneuriat au Burkina Faso, notamment dans le secteur informel. Ce choix est-il rationnel et motivé par les opportunités de gains et/ou plutôt contrainte par l’absence d’opportunité d’emploi ? Cette partie questionne aussi les motivations d’entrée dans l’entrepreneuriat selon le genre. Pour répondre à ces interrogations, nous avons utilisé les données de l’Enquête Nationale sur le Secteur Informel collectées en 2015 auprès des ménages, au Burkina Faso. Nous avons analysé les écarts de gains entre les différents segments d’emplois et examiné les déterminants du choix de l’entrepreneuriat par le biais de modèles structurels. Dans un premier temps, l’analyse sur l’ensemble de la population active occupée montre que les salariés disposent en moyenne de revenus plus élevés que les entrepreneurs. Elle montre également que le choix du statut d’entrepreneur est principalement fondé sur le différentiel de gains escompté, soutenant ainsi le principe de l’avantage comparatif décrit dans les modèles d’auto-sélection. Cependant, en tenant compte de l’hétérogénéité des statuts d’emplois (formel et informel) nous remarquons que les emplois informels sont en moyenne moins rémunérateurs que les emplois formels, et que l’écart de gains escompté a, cette fois-ci, un impact négatif et significatif sur la probabilité d’entreprendre de manière informelle. Par ailleurs, le risque d’être au chômage constitue un élément déterminant du choix de ce statut d’emploi. Ces résultats, observés chez les hommes comme chez les femmes, indiquent que le marché du travail dans les pays en développement est segmenté et que l’entrée dans l’entrepreneuriat informel est particulièrement contrainte.Les résultats de cette partie nous ont ensuite conduit à nous interroger, dans une deuxième partie de la thèse, sur le projet professionnel des individus qui n’étaient pas encore entrés sur le marché du travail. A partir de données collectées auprès des étudiants des Universités Ouaga 1 et Ouaga 2, nous avons cherché à comprendre quels pourraient être les facteurs susceptibles de favoriser ou d’inhiber leur projet de création. Nous avons ainsi analysé les déterminants de l’intention entrepreneuriale à travers différentes méthodes d’estimations. Les résultats de nos analyses montrent que l’aspiration entrepreneuriale des étudiants est fondée sur l’espérance de gains mais également sur des attentes non pécuniaires, en particulier le besoin d’indépendance/d’autonomie. Nous remarquons que ce sont les individus disposant d’un stock de capital humain plus étendu – les jack off all trades – qui sont plus susceptibles de proclamer leur projet de création, et non ceux qui étaient à un stade avancé dans leurs études. Nous constatons également que ce sont les individus qui ont une plus grande maitrise en compétences managériales et spécifiques, et qui ont bénéficié d’un enseignement spécifique à l’entrepreneuriat qui sont davantage susceptibles de vouloir créer une entreprise.
A decision maker wishes to fill a vacancy with a fixed wage. Candidates who are more valuable to the decision maker are less likely to be available. The candidates suffer a disutility from filling the position when they are ranked low on the decision maker's preference list. However, the decision maker's preferences are his private information. Therefore, the candidates infer the decision maker's preference list from information revealed by the number of failed offers. We explore the adverse effect of the social component in the candidates’ preferences on the decision maker's ability to recruit a suitable candidate.
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We propose a novel approach to model joint consumption decisions of individuals who care for each other. The model encompasses a continuum of group consumption models situated between the fully cooperative model and the noncooperative model without caring. We also define a measure for the degree of intragroup cooperation that quantifies how close the observed group behaviour is to fully cooperative behaviour. Following a revealed preference approach, we derive testable implications of the model for empirical data. We use our model to analyse decisions made by children in an experimental setting.
In this paper, we examine strategic settings in which players have interdependent preferences. Players' utility functions depend not only on the strategy profile being played, but also on the realized utilities of other players. Thus, players' realized utilities are interdependent, capturing the psychological phenomena of affective empathy and emotional contagion. We offer a solution concept for these empathetic games and show that the set of equilibria is non-empty and, generically, finite. Motivated by psychological evidence, we then analyze sympathetic and antipathetic games. In the former, players' utilities increase in others' realized utilities, capturing unconditional friendship; in the latter, the opposite holds, resembling hostility.
The supply chain contracting has traditionally been based on the profit maximization assumption. Recent research has shown that some behavior factors may influence the decision making of supply chain members. The authors utilize a linear utility function to depict such behavior factors and incorporate these into the newsvendor model. The linear utility function provides sufficient flexibility to better capture people's various behavior factors. By supposing the agents are concerned with behavior factors, the authors first investigate how the factors affect the supply chain under wholesale price contract, and find that they do not influence coordination condition, but can adjust the distribution of profits. Then they extend their study to other four common contracts with a similar method and systematically demonstrate that the behavior of agents in such a linear setting has no effect on the conditions of coordinating supply chain.
Power—the ability to determine the outcomes of others—usually comes with various benefits: higher compensation, public recognition, etc. We develop a new game, the Power Game, to demonstrate that a substantial fraction of individuals enjoy the intrinsic value of power: they accept lower payoffs in exchange for power over others, without any benefits to themselves. These preferences exist independently of other components of decision rights, cannot be explained by social preferences and are not driven by mistakes, confusion or signaling intentions. We further show that valuation of power (i) is higher when individuals directly determine outcomes of others; (ii) depends on how much discretion one has over those outcomes; and (iii) is tied to relationships between individuals. We establish that ignoring preferences for power may have large welfare implications and, consequently, should be included in the study of political systems and labor contracts.
Our thesis proposes to change the ontology and methodology of game theory, appraising games as the understanding of the players’ strategic reasoning process. Our contribution is based on an interdisciplinary approach for a reassessment of the kind of intersubjectivity involved in strategic reasoning. We claim that the analysis of games should involve the study and the determination of the reasoning process that lead the players to a specific outcome, i.e. to a specific solution. A game should not be understood, like in standard game theory, as a mathematical representation of an individual choice at the equilibrium. This requires investigating the players’ capacity of coordination. We assert that understanding the process of coordination allows understanding strategic reasoning and ultimately to provide new answers to the indeterminacy problem of game theory which is one of the stalemates that game theory faces and which underscores its positive and normative difficulties. The thesis is grounded on the argument that understanding the players’ reasoning process in games necessitates first and foremost to explain how the players form their beliefs regarding each other’s choices, but also each other‘s perceptions and beliefs and reasoning processes in a strategic context. One of the purposes of the thesis is to show that a psychological theory explaining the formation of players’ beliefs is required to account for coordination, and that the Theory of Mind (ToM) offers such adequate psychological framework. We suggest building an alternative theory of games based on the simulation theory as such theory of mind. We then specify an axiomatic characterization of rational choices in games in the presence of players able to simulate the reasoning of others.
In contrast to guilt based reciprocity, which hypothesizes that reciprocity is an increasing function of the 2nd order expectation of trustor’s 1st order expectations for reciprocation, we test for reciprocity which is a decreasing function of trustees 2nd order expectations, i.e., that people can reciprocate out of gratitude. To unambiguously decrease 2nd order expectations in our treatment, we broke up a standard trust game into a two stage dictator game where the 1st round dictator was not informed about the possibility of a 2nd round. Furthermore, the 2nd dictator could “silently exit” by not sending anything to the 1st round dictator. We found a significant increase in both the amount of reciprocation and the number of people reciprocating as compared to our standard trust and dictator games controls. Most 2nd dictators became poorer than 1st dictators so inequality aversion can be ruled out. We found support for our hypothesis in the prior data of others who tested for guilt based reciprocity. Our result also seems to reconcile conflicting results in that literature. To our knowledge, this is the first paper which shows that kindness distinct from guilt, shame, efficiency, and inequity aversion could be a motive for reciprocity. Our strong positive reciprocity result also suggests why it has been difficult to find in the past.
We introduce a parametric model of other-regarding preferences in which my emotional state determines the marginal rate of substitution between my own and others' payoffs, and thus my subsequent choices. In turn, my emotional state responds to relative status and to the kindness or unkindness of others' choices. Structural estimations of this model with six existing data sets demonstrate that other-regarding preferences depend on status, reciprocity, and perceived property rights.
This manuscript collects proofs and other material omitted from Dy- namic Psychological Games, mimeo, November 2007 (DPG). To make it more self-contained, key de…nitions and results of the main paper are in- cluded. For the convenience of readers of DPG, the numbers of equations and statements coincide with DPG.
A formal model is given of Harsanyi's infinite hierarchies of beliefs. It is shown that the model closes with some Bayesian game with incomplete information, and that any such game can be approximated by one with a finite number of states of world.
Recently developed models of fairness can explain a wide variety of seemingly contradictory facts. One of the most controversial and yet unresolved issues in the modeling of fairness preferences concerns the behavioral relevance of fairness intentions. Intuitively, fairness intentions seem to play an important role in economic relations, political struggles, and legal disputes but there is surprisingly little direct evidence for its behavioral importance. We provide experimental evidence for the behavioral relevance of fairness intentions in this paper. Our main result indicates that the attribution of fairness intentions is important in both the domains of negatively and positively reciprocal behavior. This means that equity models exclusively based on preferences over the distribution of material payoffs cannot capture reciprocal behavior. Models that take players' fairness intentions and distributional preferences into account are consistent with our data, while models that focus exclusively on intentions or on the distribution of material payoffs are not.
There is strong evidence that people exploit their bargaining power in competitive markets but not in bilateral bargaining
situations. There is also strong evidence that people exploit free-riding opportunities in voluntary cooperation games. Yet,
when they are given the opportunity to punish free riders, stable cooperation is maintained, although punishment is costly
for those who punish. This paper asks whether there is a simple common principle that can explain this puzzling evidence. We show that if some people care about equity the puzzles can be resolved. It turns
out that the economic environment determines whether the fair types or the selfish types dominate equilibrium behavior.
There has been a long-standing dispute in the philosophical literature about the conditions under which a behavior counts as 'intentional.' Much of the debate turns on questions about the use of certain words and phrases in ordinary language. The present paper investigates these questions empirically, using experimental techniques to investigate people's use of the relevant words and phrases. g
In games with incomplete information, conventional hierarchies of belief are incomplete as descriptions of the players' information for the purposes of determining a player's behavior. We show by example that this is true for a variety of solution concepts. We then investigate what is essential about a player's information to identify behavior. We specialize to two player games and the solution concept of interim rationalizability. We construct the universal type space for rationalizability and characterize the types in terms of their beliefs. Infinite hierarchies of beliefs over conditional beliefs, which we call Delta-hierarchies, are what turn out to matter. We show that any two types in any two type spaces have the same rationalizable sets in all games if and only if they have the same Delta-hierarchies.
This paper constructs a two-country (Home and Foreign) general equilibrium model of Schumpeterian growth without scale effects. The scale effects property is removed by introducing two distinct specifications in the knowledge production function: the permanent effect on growth (PEG) specification, which allows policy effects on long-run growth; and the temporary effects on growth (TEG) specification, which generates semi-endogenous long-run economic growth. In the present model, the direction of the effect of the size of innovations on the pattern of trade and Home’s relative wage depends on the way in which the scale effects property is removed. Under the PEG specification, changes in the size of innovations increase Home’s comparative advantage and its relative wage, while under the TEG specification, an increase in the size of innovations increases Home’s relative wage but with an ambiguous effect on its comparative advantage.
There is strong evidence that people exploit their bargaining power in competitive markets but not in bilateral bargaining situations. There is also strong evidence that people exploit free-riding opportunities in voluntary cooperation games. Yet, when they are given the opportunity to punish free riders, stable cooperation is maintained, although punishment is costly for those who punish. This paper asks whether there is a simple common principle that can explain this puzzling evidence. We show that if some people care about equity the puzzles can be resolved. It turns out that the economic environment determines whether the fair types or the selfish types dominate equilibrium behavior. © 2000 the President and Fellows of Harvard College and the Massachusetts Institute of Technology
We define and analyze a "strategic topology" on types in the Harsanyi-Mertens- Zamir universal type space, where two types are close if their strategic behavior is similar in all strategic situations. For a fixed game and action define the distance be- tween a pair of types as the di¤erence between the smallest " for which the action is " interim correlated rationalizable. We define a strategic topology in which a sequence of types converges if and only if this distance tends to zero for any action and game. Thus a sequence of types converges in the strategic topology if that smallest " does not jump either up or down in the limit. As applied to sequences, the upper-semicontinuity prop- erty is equivalent to convergence in the product topology, but the lower-semicontinuity property is a strictly stronger requirement, as shown by the electronic mail game. In the strategic topology, the set of "finite types" (types describable by finite type spaces) is dense but the set of finite common-prior types is not.
In a general interdependent preference environment, we characterize when two payoff types can be distinguished by their rationalizable strategic choices without any prior knowledge of their beliefs and higher order beliefs. We show that two types are strategically distinguishable if and only if they satisfy a separability condition. The separability condition for each agent essentially requires that there is not too much interdependence in preferences across agents. A social choice function -- mapping payoff type profiles to outcomes -- can be robustly virtually implemented if there exists a mechanism such that every equilibrium on every type space achieves an outcome arbitrarily close to the social choice function: this definition is equivalent to requiring virtual implementation in iterated deletion of strategies that are strictly dominated for all beliefs. The social choice function is robustly measurable if strategically indistinguishable types receive the same allocation. We show that ex post incentive compatibility and robust measurability are necessary and sufficient for robust virtual implementation.
Evidence shows that real-effort investments can affect bilateral bargaining outcomes. This paper investigates whether similar investments can inhibit equilibrium convergence of experimental markets. In one treatment, sellers’ relative effort affects the allocation of production costs, but a random productivity shock ensures that the allocation is not necessarily equitable. In another treatment, sellers’ effort increases the buyers’ valuation of a good. We find that effort investments have a short-lived impact on trading behavior when sellers’ effort benefits buyers, but no effect when effort determines cost allocation. Efficiency rates are high and do not differ across treatments.
Evidence shows that real-effort investments can affect bilateral bargaining outcomes. This paper investigates whether similar investments can inhibit equilibrium convergence of experimental markets. In one treatment, sellers’ relative effort affects the allocation of production costs, but a random productivity shock ensures that the allocation is not necessarily equitable. In another treatment, sellers’ effort increases the buyers’ valuation of a good. We find that effort investments have a short-lived impact on trading behavior when sellers’ effort benefits buyers, but no effect when effort determines cost allocation. Efficiency rates are high and do not differ across treatments.
We analyze a family of extensive-form solution procedures for games with incomplete information that do not require the specification of an epistemic type space a la Harsanyi, but can accommodate a (commonly known) collection of explicit restrictions D on first-order beliefs. For any fixed D we obtain a solution called D-rationalizability. In static games, D-rationalizability characterizes the set of outcomes (combinations of payoff types and strategies) that may occur in any Bayesian equilibrium model consistent with D; these are precisely the outcomes consistent with common certainty of rationality and of the restrictions D. Hence, our approach to the analysis of incomplete-information games is consistent with Harsanyi's, and it may be viewed as capturing the robust implications of Bayesian equilibrium analysis. In dynamic games, D-rationalizability yields a forward-induction refinement of this set of Bayesian equilibrium outcomes. Focusing on the restriction that first-order beliefs be consistent with a given distribution on terminal nodes, we obtain a refinement of self-confirming equilibrium. In signalling games, this refinement coincides with the Iterated Intuitive Criterion.
The recent research on ultimatum and dictator games is reviewed. New experiments reveal that the ultimatum game is quite robust to changes in stakes and the nationality of the players but dictator games are sensitive to many design features. Information in the ultimatum game is important. Responders will reject offers only if they are known to be proportionally stingy and are known to be chosen by the proposer (rather than picked at random). Much of the observed behavior can be successfully modeled using Matthew Rabin's (1993) notion of a fairness equilibrium, which incorporates manners into economics. In many market contexts, politeness pays. Copyright 1995 by American Economic Association.
Contents: The rudiments of set theory.- Number systems.- Linear analysis.- Cardinal numbers.- Ordinal numbers.- Metric spaces.- Continuity and limits.- Completeness and compactness.- General topology.- Bibliography.- Index.
This paper proposes the solution concept of interim rationalizability, and shows that all type spaces that have the same hierarchies of beliefs have the same set of interim rationalization outcomes. This solution concept characterizes common knowledge of rationality in the universal type space.
A universal type space of interdependent expected utility preference types is constructed from higher-order preference hierarchies describing (i) an agent's (unconditional) preferences over a lottery space; (ii) the agent's preference over Anscombe-Aumann acts conditional on the unconditional preferences; and so on.Two types are said to be strategically indistinguishable if they have an equilibrium action in common in any mechanism that they play. We show that two types are strategically indistinguishable if and only if they have the same preference hierarchy. We examine how this result extends to alternative solution concepts and strategic relations between types.
This article complements the experimental literature that has shown the importance of reciprocity for behaviour in stylised labour markets or other decision settings. We use individual measures of reciprocal inclinations in a large, representative survey and relate reciprocity to real world labour market behaviour and life outcomes. We find that reciprocity matters and that the way in which it matters is very much in line with the experimental evidence. In particular, positive reciprocity is associated with receiving higher wages and working harder. Negatively reciprocal inclinations tend to reduce effort. Negative reciprocity increases the likelihood of being unemployed.
People are reciprocal if they reward kind actions and punish unkind ones. In this paper we present a formal theory of reciprocity. It takes into account that people evaluate the kindness of an action not only by its consequences but also by its underlying intention. The theory is in line with the relevant stylized facts of a wide range of experimental games, such as the ultimatum game, the gift-exchange game, a reduced best-shot game, the dictator game, the prisoner's dilemma, and public goods games. Furthermore, it predicts that identical consequences trigger different reciprocal responses in different environments. Finally, the theory explains why outcomes tend to be fair in bilateral interactions whereas extremely unfair distributions may arise in competitive markets.
This paper assumes that in addition to conventional preferences over outcomes, players in a strategic environment have preferences over strategies. It provides conditions under which a player's preferences over strategies can be represented as a weighted average of the utility from outcomes of the individual and his opponents. The weight one player places on an opponent's utility from outcomes depends on the players’ joint behavior. In this way, the framework is rich enough to describe the behavior of individuals who repay kindness with kindness and meanness with meanness. The paper identifies restrictions that the theory places on rational behavior.
Many experimental studies indicate that people are motivated by reciprocity. Rabin [Amer. Econ. Rev. 83 (1993) 1281] develops techniques for incorporating such concerns into game theory and economics. His theory is developed for normal form games, and he abstracts from information about the sequential structure of a strategic situation. We develop a theory of reciprocity for extensive games in which the sequential structure of a strategic situation is made explicit, and propose a new solution concept—sequential reciprocity equilibrium—for which we prove an equilibrium existence result. The model is applied in several examples, and it is shown that it captures very well the intuitive meaning of reciprocity as well as certain qualitative features of experimental evidence.
In this paper, we construct a universal type space for a class of possibility models by imposing topological restrictions on the players’ beliefs. Along the lines of Mertens and Zamir [International Journal of Game Theory, 14 (1985) 1] or Brandenburger and Dekel [Journal of Economic Theory 59 (1993) 189], we show that the space of all hierarchies of compact beliefs that satisfy common knowledge of coherency (types) is canonically homeomorphic to the space of compact beliefs over the state of nature and the types of the other players. The resulting type space is universal, in the sense that any compact and continuous possibility structure can be uniquely represented within it. We show how to extend our construction to conditional systems of compact beliefs.
In psychological games the payoff to each player depends not only on what every player does but also on what he thinks every player believes, and on what he thinks they believe others believe, and so on. In equilibrium, beliefs are assumed to correspond to reality. Yet psychological games and psychological equilibria allow one to model belief-dependent emotions such as anger and surprise that are problematic for conventional game theory. We are particularly interested in issues of sequential rationality for psychological games. We show that although backward induction cannot be applied, and “perfect” psychological equilibria may not exist, subgame perfect and sequential equilibria always do exist.
We designed an experiment to study trust and reciprocity in an investment setting. This design controls for alternative explanations of behavior including repeat game reputation effects, contractual precommitments, and punishment threats. Observed decisions suggest that reciprocity exists as a basic element of human behavior and that this is accounted for in the trust extended to an anonymous counterpart. A second treatment, social history, identifies conditions which strengthen the relationship between trust and reciprocity.
The paper begins by presenting an axiomatic model of simple and iterated knowledge. A formal definition of the intuitive notion of common knowledge is given and shown equivalent to previous characterizations. It is shown that agents have information partitions. The second part generalizes Aumann's (Ann. Statist.4 (1976), 1236–1239) well-known propositions about common knowledge between two rational agents of each other's probability assignments. It is shown that: common knowledge of decisions—if these are rational—implies a common decision for like-minded agents; and that a “dialogue” in decisions leads to a common decision. A “no-trade” theorem is given which includes trade under complete uncertainty.
We de.ne and analyze a strategic topology on types in the Harsanyi-Mertens-Zamir universal type space, where two types are close if their strategic behavior is similar in all strategic situations. For a .xed game and action de.ne the distance be-tween a pair of types as the diþerence between the smallest for which the action is interim correlated rationalizable. We de.ne a strategic topology in which a sequence of types converges if and only if this distance tends to zero for any action and game. Thus a sequence of types converges in the strategic topology if that smallest does not jump either up or down in the limit. As applied to sequences, the upper-semicontinuity prop-erty is equivalent to convergence in the product topology, but the lower-semicontinuity property is a strictly stronger requirement, as shown by the electronic mail game. In the strategic topology, the set of .nite types (types describable by .nite type spaces) is dense but the set of .nite common-prior types is not.
Two people, 1 and 2, are said to have common knowledge of an event $E$ if both know it, 1 knows that 2 knows it, 2 knows that 1 knows is, 1 knows that 2 knows that 1 knows it, and so on. THEOREM. If two people have the same priors, and their posteriors for an event $A$ are common knowledge, then these posteriors are equal.
Departures from self-interest in economic experiments have recently inspired models of “social preferences.” We design a range
of simple experimental games that test these theories more directly than existing experiments. Our experiments show that subjects
are more concerned with increasing social welfare—sacrificing to increase the payoffs for all recipients, especially low-payoff
recipients—than with reducing differences in payoffs (as supposed in recent models). Subjects are also motivated by reciprocity:
they withdraw willingness to sacrifice to achieve a fair outcome when others are themselves unwilling to sacrifice, and sometimes
punish unfair behavior.
The motivation of decision makers who care for various emotions, intentions-based reciprocity, or the opinions of others may depend directly on beliefs (about choices, beliefs, or information). Geanakoplos, Pearce and Stacchetti [J. Geanakoplos, D. Pearce, E. Stacchetti, Psychological games and sequential rationality, Games Econ. Behav. 1 (1989) 60-79] point out that traditional game theory is ill-equipped to address such matters, and they pioneer a new framework which does. However, their toolbox - psychological game theory - incorporates several restrictions that rule out plausible forms of belief-dependent motivation. Building on recent work on dynamic interactive epistemology, we propose a more general framework. Updated higher-order beliefs, beliefs of others, and plans of action may influence motivation, and we can capture dynamic psychological effects (such as sequential reciprocity, psychological forward induction, and regret) that were previously ruled out. We develop solution concepts, provide examples, explore properties, and suggest avenues for future research.
While there is an extensive literature on the theory of infinitely repeated games, empirical evidence on how "the shadow of the future" affects behavior is scarce and inconclusive. I simulate infinitely repeated prisoner's dilemma games in the lab with a random continuation rule. The experimental design represents an improvement over the existing literature by including sessions with finite repeated games as controls and a large number of players per session (which allows for learning without contagion effects). I find that the shadow of the future matters not only by significantly reducing opportunistic behavior, but also because its impact closely follows theoretical predictions.
Game-theoretic analysis often leads to consideration of an infinite hierarchy of beliefs for each player. Harsanyi suggested that such a hierarchy of beliefs could be summarized in a single entity, called the player′s type. This paper provides an elementary construction, complementary to the construction already given in [J-F. Mertens and S. Zamir, Formulation of Bayesian analysis for games with incomplete information, Int. J. Game Theory14 (1985), 1–29] of Harsanyi′s notion of a type. It is shown that if a player′s type is coherent then it induces a belief over the types of the other players. Imposing common knowledge of coherency closes the model of beliefs. We go on to discuss the question that often arises as to the sense in which the structure of a game-theoretic model is, or can be assumed to be, common knowledge. Journal of Economic Literature Classification Number: 026.
This paper shows that increases in the minimum wage rate can have ambiguous effects on the working hours and welfare of employed workers in competitive labor markets. The reason is that employers may not comply with the minimum wage legislation and instead pay a lower subminimum wage rate. If workers are risk neutral, we prove that working hours and welfare are invariant to the minimum wage rate. If workers are risk averse and imprudent (which is the empirically likely case), then working hours decrease with the minimum wage rate, while their welfare may increase.
This paper shows that increases in the minimum wage rate can have ambiguous effects on the working hours and welfare of employed workers in competitive labor markets. The reason is that employers may not comply with the minimum wage legislation and instead pay a lower subminimum wage rate. If workers are risk neutral, we prove that working hours and welfare are invariant to the minimum wage rate. If workers are risk averse and imprudent (which is the empirically likely case), then working hours decrease with the minimum wage rate, while their welfare may increase.
People like to help those who are helping them and to hurt those who are hurting them. Outcomes rejecting such motivations are called fairness equilibria. Outcomes are mutual-max when each person maximizes the other's material payoffs, and mutual-min when each person minimizes the other's payoffs. It is shown that every mutual-max or mutual-min Nash equilibrium is a fairness equilibrium. If payoffs are small, fairness equilibria are roughly the set of mutual-max and mutual-min outcomes; if payoffs are large, fairness equilibria are roughly the set of Nash equilibria. Several economic examples are considered and possible welfare implications of fairness are explored. Copyright 1993 by American Economic Association.
An explicit model of communication and informational equilibrium is constructed and some results generalizing Aumann's theorem on the impossibility of agreeing to disagree are obtained, together with an example showing that full rationality may be sub-optimal.
Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates.
Building upon recent models of social utility theory, this paper outlines a theoretical framework for examining the effect of causal attributions on choice in social decision making. The results of three empirical studies are reported, which identify two dimensions of external attribution that affect how individuals weight absolute versus comparative payoffs. These dimensions are whether the causal agent is perceived to be human versus non-human (e.g., an act of nature) and the degree to which human agents are perceived to have an interest in the outcome of the decision. Together, these findings have implications for social welfare policies, dispute resolution, and game theoretic models.
Cost-effectiveness analysis, which ranks projects by quality adjusted life years gained per dollar spent, is widely used in the evaluation of health interventions. We show that cost effectiveness analysis can be derived from two axioms: society prefers Pareto improvements and society values discounted life years, lived in perfect health, equally for each person. These axioms generate a unique social preference ordering, allowing us to find the cost effectiveness threshold to which health projects should be funded, and to extend cost effectiveness analysis to give a consistent method of project evaluation across all sectors of the economy.
Experiments, ethnography, and introspection provide evidence economic agents do not act to maximize their narrowly defined self interest. Expanding the domain of preferences to include the utility of others provides a coherent way to extend rational choice theory.
There are two approaches for including extended or social preferences in strategic models. One posits that agents have extended preferences, but maintains the conventional assumption that these preferences are stable. Prominent examples of this approach permit agents to exhibit concern for status, inequality, and social welfare. The other approach permits the strategic context to determine the nature of individual preferences. Context-dependent preferences can capture the possibility that agents are motivated in part by reciprocity. They may sacrifice personal consumption in order to lower the utility of unkind agents or to raise the utility of kind agents.
This paper surveys the evidence in favor of social preferences and describes the implications of the leading theoretical models of extended preferences. It presents behavioral assumptions that characterize different types of social preferences. It investigates the extent to which social preferences may arise as the limit of evolutionary processes. It discusses the relationship between norms of reciprocity and social preferences in repeated interactions.
Interdependent Preferences and Strategic Distinguishability, " mimeo, Princeton University When Social Outcomes Aren't Fair: The Effect of Causal Attributions on Preferences
- D Bergemann
- S Morris
- S Takahashi
Bergemann, D. and S. Morris and S. Takahashi (2010) " Interdependent Preferences and Strategic Distinguishability, " mimeo, Princeton University. Blount, S. (1995), " When Social Outcomes Aren't Fair: The Effect of Causal Attributions on Preferences, " Organizational Behavior and Human Decision Processes, 63, 131–44.
A Theory of Reciprocity Games and Economic Be-havior
- A Falk
- U Fishbacher
Falk A. and U. Fishbacher (2006) " A Theory of Reciprocity, " Games and Economic Be-havior, 54(2), 293–315.
Testing Theories of Fairness -Intentions Matter
- A Falk
- E Fehr
- U Fishbacher
Falk A., E. Fehr and U. Fishbacher (2008) "Testing Theories of Fairness -Intentions
Matter", Games and Economic Behavior, 62(1), 287-303.