Abstract
We report experimental evidence on second-movers’ behavior in the investment game (also known as the trust game) when there exists endowment heterogeneity. Using a within-subject analysis, we investigate whether or not second-movers exhibit some taste for inequality aversion by returning a larger (smaller) share of the available funds to first-movers who are initially endowed with a lesser (larger) endowment, respectively. Our data suggest that second-movers do not take into consideration the level of endowments when making their decisions as their behavior is consistent across distribution of endowments; i.e., they return the same proportion of the available funds regardless of the endowments. We indeed find that some second-movers have a tendency to return what they have received from first-movers. In our data, there is also a substantial proportion of second-movers who are selfish and return nothing. (JEL Codes: C72, C91, D3, D63).
Highlights
Models of inequality aversion posit that individuals dislike payoff differences, they may be willing to forego monetary payoffs to reduce inequality
We used the behavioral data in [6] to test this behavioral motive using a within-subject design where subjects play the investment game repeatedly with different level of endowments that vary across rounds
We find that allocators have a tendency to reciprocate investors’ behavior by sending a share of the available funds that is consistent across distributions
Summary
Models of inequality aversion posit that individuals dislike payoff differences, they may be willing to forego monetary payoffs to reduce inequality (e.g., see [1], [2]). For example, the investment game ( known as the trust game) in [3] In this sequential game, the first-mover (hereafter, the investor, she) has to decide which part of her endowment (if any) she wants to send to a second-mover (hereafter, the allocator, he). Assume that subjects differ in their initial endowments, if the unequal distribution of endowments is in favor of the investor reciprocal behavior from the allocator may induce more inequality. This type of situation is studied in [4], who show that allocators have a tendency not to pay back if doing so would increase inequality (see [5]).
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