Behavioral eco lect 6: Strategic interaction part 6

Social preferences

• Standard assumption: u(x,y) does not depend on y

• Social preferences: altruism, envy, Rawls, inequality aversion

Consider two players.
x = payoff player 1, y = payoff player 2
u(x, y) is utility of player 1 given allocation (x,y)

Social preferences

• Envy: u(x,y) decreases if y increases
e.g. u(x,y) =2ln(1+x) – ln(1+y)

• Rawlsian preferences: u(x,y) equals the utility of the worst off e.g. u(x,y) =min{ln(1+x), ln(1+y)}

• Altruism: u(x,y) increases if y increases
e.g. u(x,y) =2ln(1+x) + ln(1+y)

• Inequality aversion: u(x,y) increases if inequality |y-x| decreases e.g. u(x,y) =ln(1+x) – |ln(1+y) – ln(1+x)|

Reciprocity

• Process fairness: we derive utility from how we get to the final allocation of payoffs

• Reciprocity: we care about people’s intentions.

• Outcome fairness: we derive utility from the final allocation of payoffs, not only from our own payoffs.

Overview

• Limited strategic reasoning

• Social preferences

• Strategic interaction

Three no-longer-puzzling phenomena

• Dutch postal code lottery: either regret or social preferences (or both) play a role

• Contributing to the provision of public goods: can be based on strategic reasons as well as on social preferences

• Giving a tip to waiters: can be based on strategic reasons as well as on social preferences