Fairness Preferences in a Bilateral Trade Experiment

Alice Ciccone,Ragnhild Braaten,Ole Rogeberg

doi:10.3390/g11010008

Abstract

Is the willingness to make trades influenced by how the total gains from trade are split between the trading partners? We present results from a bilateral trade game (n = 128) where all participants were price-takers and trading pairs faced one of three exogenously imposed trading prices. The fixed prices divided the gains either symmetrically in the reference treatment or asymmetrically in treatments favoring either the buyer or seller. Price treatments generating asymmetric gains from trade reduced desired transaction levels on both sides of the market, but more strongly by the disfavored party. The data weakly indicated a larger reduction when the disfavored party was a seller.

Highlights

Public concern with fairness in consumer and labor markets has been widely documented by surveys [1,2,3], boycotts or by increased demand for “fair trade” and charity-linked products [4,5,6,7].These phenomena suggest that perceptions of fairness in terms of trade may influence the desire to trade.Some people may feel “exploited” by low wages or high prices; they may feel that they would exploit others if they bought products involving unfair trade with developing countries [8]; or they may want to disassociate themselves from markets seen as legitimizing unfair actions
If the underlying heterogeneity in baseline trading preferences can be captured using the flexible beta-distribution, this implies that the number of rejected transactions will follow a beta-binomial distribution. Note that this imposes no strong structure on the preference distribution: It allows for a bi-modal distribution where people are either trading fully or not at all, as well as distributions where people are concentrated around a specific region of trade-rejection probabilities
Fehr and Schmidt model would predict that any single participant would trade fully or not at all

Summary

Introduction

Public concern with fairness in consumer and labor markets has been widely documented by surveys [1,2,3], boycotts or by increased demand for “fair trade” and charity-linked products [4,5,6,7]. Previous research has found that buyers in posted-offer experiments withhold Pareto-improving trade when posted prices implied an uneven distribution of the gains, and that this effect decreased substantially in the final rounds This suggests that the early restrictions were strategically motivated to force fairer offers in later rounds [12,13,14], indicating a smaller role for other-regarding preferences. Since all trades under all price regimes were Pareto-improving in monetary payoffs, both minimax, efficiency and strategic theories of inequality aversion would predict full trade, while the inequality aversion theory of Fehr and Schmidt [15] would predict trade restriction This allows us to study whether “pure” inequality aversion influences willingness to trade in a trade setting where these potential confounds are removed by design. We conclude by discussing the findings and their implications

Experimental Design

The Trade Game

Results

Statistical Model

Estimation

Conclusions