Material Payoffs Research Articles

When Punishment Doesn't Pay: 'Cold Glow' and Decisions to Punish

Economic theories of punishment focus on determining the levels that provide maximal social material payoffs. In calculating these levels several parameters are key: total social costs, total social benefits and the probability that offenders are apprehended. However, levels of punishment often are determined by aggregates of individual decisions. Research in behavioral economics, psychology and neuroscience shows that individuals appear to treat punishment as a private good (“cold glow”). Thus individual choices may not respond “appropriately” to the parameters above. This can have large consequences: realized punishment levels can be predictably above or below those that maximize aggregate material payoffs. Such behavior can lead to inefficiencies in final social outcomes such as levels of cooperation and total costs incurred. We confirm these predictions in a series of experiments. Our findings highlight the importance of the psychology of punishment for understanding social outcomes and for designing social mechanisms, for example in sentencing policy.

Truth, Trust, and Sanctions: On Institutional Selection in Sender–Receiver Games*

AbstractWe have conducted a laboratory experiment to investigate the impact of institutions and institutional choice on truth‐telling and trust in sender–receiver games. We find that in an institution with sanctioning opportunities, receivers sanction predominantly after having trusted lies. Individuals who sanction are responsible for truth‐telling beyond standard equilibrium predictions, and they are more likely to choose the sanctioning institution. Sanctioning and non‐sanctioning institutions coexist if their choice is endogenous, and the former shows a higher level of truth‐telling but lower material payoffs. Our experimental findings are consistent with logit agent quantal response equilibrium with two distinct groups of individuals: one consisting of subjects who experience non‐monetary lying costs as senders and non‐monetary costs when being lied to as receivers, and the other consisting of payoff maximizers.

Mixing the carrots with the sticks: third party punishment and reward

While the opportunity to punish selfish and reward generous behavior coexist in many instances in daily life, in most laboratory studies, the demand for punishment and reward are studied separately from one another. This paper presents the results from an experiment measuring the demand for reward and punishment by ‘unaffected’ third parties, separately and jointly. We find that the demand for costly punishment is substantially lower when individuals are also given the ability to reward. Similarly, the demand for costly reward is lower when individuals can also punish. The evidence indicates the reason for this is that costly punishment and reward are not only used to alter the material payoff of others as assumed by recent economic models, but also as a signal of disapproval and approval of others’ actions, respectively. When the opportunity exists, subjects often choose to withhold reward as a form of costless punishment, and to withhold punishment as a form of costless reward. We conclude that restricting the available options to punishing (rewarding) only, may lead to an increase in the demand for costly punishment (reward).

Fairness overrides reputation: the importance of fairness considerations in altruistic cooperation

Behavioral findings in several strategic games indicate that people punish others if they think they are being treated unequally, even at the cost of minimizing their own material payoff. We investigated the primary driving force behind such non-self-regarding behavior, so-called, altruistic cooperation. In all of our studies, a mini ultimatum game was played either one-shot (in Experiment 1a and 1b) or repeatedly (Experiment 2), and rejections of inequitable distribution were taken as a measure of altruistic cooperation. In Experiment 1a, we replicated previous findings indicating that the key mechanism contributing to the emergence of altruistic cooperation is fairness considerations. In Experiment 1b, we delved into the relative importance of two aspects of fairness considerations (i.e., outcome fairness and intentions) and showed that both aspects were effective in determining the level of altruistic cooperation, with the contribution of intentions being more important. In Experiment 2, we investigated the effect of the opportunity for reputation building and future interaction on altruistic cooperation. We found that these factors became influential only when fairness considerations were weakened, particularly, as a result of the removal of the possible intentions behind an offer.

The Impact of Economic Incentives and Peer Behavior on Opportunistic Reporting Behavior

Classical agency theory argues that economic incentives can have a strong impact on opportunistic reporting behavior. On the other hand, behavioral literature starts to suggest that agents also adhere to descriptive norms established by peers. Most studies, however, examine these effects in isolation, ignoring the role of mechanisms that firms use to constrain opportunistic behavior. This research shows that either the effect of incentives or that of peer behavior can dominate, depending on whether or not the firm uses a system to detect misreporting. In an experiment, we vary the material pay-offs for lying (low vs. high compensation rate), the behavior of peers (i.e. peers engaging in low vs. high dishonesty) and whether or not audits are used to detect misreporting (without attaching a financial consequence to such detection). When decisions remain unaudited, results show that truthful reporting is heavily influenced by incentives (material pay-offs for misreporting), while peer behavior has no effect. Conversely, when reporting decisions are audited, peer behavior has a strong effect on truthful reporting, whereas the impact of incentives tends to be weaker. Findings imply that firms may need to consider audit mechanisms if they want to promote honesty through social norms established by peers.

Exploiting the Guilt Aversion of Others - Do Agents Do it and is it Effective?

Guilt averse agents are motivated to meet the expectations of others, even at the expense of their own material payoff. Several experimental studies have found results consistent with agents exhibiting guilt averse motivations in games. However, there are strategic implications of guilt aversion, which can impact economic outcomes in important ways, that have yet to be explored. I introduce a game that admits the possibility for agents to induce guilt upon others in a manner consistent with the method posited by Baumeister, Stillwell, and Heatherton (1994). This game enables me to experimentally test whether agents attempt to exploit the guilt aversion of others, and whether it is actually effective at influencing the behavior of others. Additionally, the design enables me to test whether agents exhibit higher degrees of trust when they are given such an opportunity to exploit the guilt aversion of others. Furthermore, I appeal to the Battigalli and Dufwenberg (2007) model of simple guilt and show that effective guilt induction can be supported as an equilibrium of the psychological game considered.

The Strategic Advantage of Inequality Averse Preferences

It is usually assumed that the sole purpose of agents is to maximize their own material payoff independently from what other agents receive, and that this yields a strategic advantage in terms of receiving a higher payoff compared to other types of players, if any. On the contrary, it is shown that in certain subclasses of games, players with negatively interdependent preferences have an unambiguous strategic advantage over the independent players (Kockesen et al., 2000). We analyze a different type of interdependency in games; in particular, we analyze games where players with inequality averse preferences have a strategic advantage over the independent players.

Is altruism bad for cooperation?

Some philosophers and social scientists have stressed the importance for good government of an altruistic citizenry that values the well being of fellow citizens. Economists, however, have emphasized the need for incentives that induce even the self-interested to contribute to the public good. Implicitly most have assumed that these two approaches are complementary or at worst additive. But this need not be the case. Behavioral experiments find that if reciprocity-minded subjects feel hostility towards free riders and enjoy inflicting harm on them, the incentives provided by the anticipated punishment support near efficient levels of contributions to a public good. Cooperation may also be supported if altruistic individuals internalize the group benefits that their contributions produce. But the effects of these two supports for high levels of cooperation may be less than additive. Using a utility function embodying both reciprocity and altruism we show that unconditional altruism attenuates the punishment motive and thus may reduce the level of punishment inflicted on defectors, resulting in lower levels of contribution. Increases in altruism may also reduce the level of benefits from the public project net of contribution costs and punishment costs. The range over which altruism inhibits cooperation and reduces material payoffs is greater, the stronger is the reciprocity motive among group members.

A Neuroeconomic Perspective on Charitable Giving

Psychologists and economists, particularly those assuming that people are rational egoists, have struggled to understand the causes of voluntary donation for decades. Why would a person decide to sacrifice part of his or her material payoff in order to increase the well being of others? In the first part of this paper, we outline a core set of possible motivations, and then consider how those motivations can be used to construct behavioral models that can also be tested in terms of what we know about brain function. We emphasize the role of other‐regarding preferences and argue that there are moral judgments, independent of any consideration of payoffs, that partially determine when and to whom such preferences exist. In the second part of the paper, we argue that a neuroeconomic perspective can help understand charitable giving, and then discuss recent neuroimaging studies that demonstrate this potential.

Decline of Class: A Group-Theoretic Approach

We present a framework of group cooperation and competition in which agents are concerned not only about their material payoffs but also about their psychological payoffs, derived from working with others per se. We show a material foundation to such psychology - the stronger a group's psychological preferences are, the greater the group's bargaining power will be in determining its terms of cooperation with other groups. We also generate implications that are consistent with two contemporary phenomena - the decline of class in the politics of industrial economies and the salience of race in the third world.

To What Extent Defining a Group Predicates on Defining Other Groups?

We present a framework of group cooperation and competition in which agents are concerned not only about their material payoffs but also about their psychological payoffs, derived from working with others per se. In such a framework, a group's psychological preferences serve to enhance the group's material payoffs. We show that a small group has strong incentives to engage in outward-looking identity strengthening, such as stereotyping or airing grievances against a specific, large outgroup, and a large group has strong incentives to engage in inward-looking identity strengthening, such as self-stereotyping, glorifying own group's history, etc.

To What Extent Defining a Group Predicates on Defining Other Groups?

We present a framework of group cooperation and competition in which agents are concerned not only about their material payoffs but also about their psychological payoffs, derived from working with others per se. In such a framework, a group's psychological preferences serve to enhance the group's material payoffs. We show that a small group has strong incentives to engage in outward-looking identity strengthening, such as stereotyping or airing grievances against a specific, large outgroup, and a large group has strong incentives to engage in inward-looking identity strengthening, such as self-stereotyping, glorifying its own history, etc.

DIRECT TESTS OF INDIVIDUAL PREFERENCES FOR EFFICIENCY AND EQUITY

Departures from “economic man” behavior in many games in which fairness is a salient characteristic are now well documented in the experimental economics literature. These data have inspired the development of models of social preferences that assume agents have preferences for equity and efficiency as well as their own material payoffs. Empirical failure of the economic man model comes from experiments that provide direct tests of its distinguishing characteristic: indifference to the payoffs of others. This paper reports an experiment that subjects popular social preferences models to the same type of empirical challenge. We report direct tests of the distinguishing characteristics of these models: preference for allocations that have higher efficiency and greater equity. (JEL A12, A13, B49, C70, C91, D63)

Cooperation over finite horizons: A theory and experiments

This paper shows that the presence of different types of players – those who only care about their own material payoffs and those who reciprocate others' contributions – can explain the robust features of observed contribution patterns in public good contribution games, even without the presence of asymmetric information. We show what conditions on reciprocity are sufficient for a unique perfect equilibrium, in which contributions are decreasing. Under these conditions, selfish players have enough future benefits to induce subsequent contributions by reciprocal players, and this incentive diminishes as the end of the game approaches. The model explains the puzzling restart effect and is consistent with various other empirical findings. We also report the results of a series of experiments, using a probabilistic continuation design in which after each set of 10-period games, the group is restarted with low probability. We find specific support for the theory in our data, including that selfish players (identified exogenously) stop contributing earlier than reciprocal players, as directly implied by the model.

LIVING IN TWO NEIGHBORHOODS—SOCIAL INTERACTION EFFECTS IN THE LABORATORY

Field evidence suggests that people belonging to the same group often behave similarly, that is, behavior exhibits social interaction effects. We conduct a laboratory experiment that avoids the identification problem present in the field and allows us to study the behavioral logic of social interaction effects. Our novel design feature is that each subject is simultaneously a member of two randomly assigned and identical groups where only members (“neighbors”) are different. We study behavior in a coordination game with multiple equilibria and a public goods game, which has only one equilibrium in material payoffs. We speak of social interactions if the same subject at the same time makes group‐specific decisions that depend on their respective neighbors' decisions. We find that a majority of subjects exhibit social interaction effects both when the game has multiple equilibria in material payoffs and when it only has one equilibrium. (JEL C91, H41, K42, H26)

Social Preferences and the Efficiency of Bilateral Exchange

Under what conditions do social preferences, such as altruism or a concern for fair outcomes, generate efficient trade? I analyze theoretically a simple bilateral exchange game: Each player sequentially takes an action that reduces his own material payoff but increases the other player’s. Each player’s preferences may depend on both his/her own material payoff and the other player’s. I identify necessary conditions and sufficient conditions on the players’ preferences for the outcome of their interaction to be Pareto efficient. The results have implications for interpreting the rotten kid theorem, gift exchange in the laboratory, and gift exchange in the field.

The Emergence of Reciprocally Beneficial Cooperation

This paper offers a new and robust model of the emergence and persistence of cooperation. In the model, interactions are anonymous, the population is well-mixed, and the evolutionary process selects strategies according to material payoffs. The cooperation problem is modeled as a game similar to Prisoner’s Dilemma, but there is an outside option of nonparticipation and the payoff to mutual cooperation is stochastic; with positive probability, this payoff exceeds that from cheating against a cooperator. Under mild conditions, mutually beneficial cooperation occurs in equilibrium. This is possible because the non-participation option holds down the equilibrium frequency of cheating.

On approval and disapproval: Theory and experiments

Prior studies have shown that selfish behavior is reduced when co-players have the opportunity to approve/disapprove a player’s choice, even if that has no consequences on the player’s material payoff. Using a prisoner’s dilemma, we experimentally study the causes of this phenomenon, which seems crucial to understand compliance with social norms. Our data is consistent with a model based on the assumption that people feel badly if they expect to be disapproved by others. Furthermore, we find suggestive evidence in line with the following assumptions: (i) people become more aware about the other’s opinion if feedback is available, and (ii) even if the feedback is ex post and has no effect on their ex ante expectations about disapproval, people prefer not to receive negative feedback.

Direct Tests of Individual Preferences for Efficiency and Equity

Departures from behavior in many games in which fairness is a salient characteristic are now well documented in the experimental economics literature. These data have inspired development of models of social preferences that assume agents have preferences for equity and efficiency as well as their own material payoffs. Empirical failure of the economic man model comes from experiments that provide direct tests of its distinguishing characteristic: indifference to the payoffs of others. This paper reports an experiment that subjects popular social preferences models to the same type of empirical challenge. We report direct tests of the distinguishing characteristics of these models: preference for allocations that have higher efficiency and greater equity.

The Neural Circuitry of a Broken Promise

Promises are one of the oldest human-specific psychological mechanisms fostering cooperation and trust. Here, we study the neural underpinnings of promise keeping and promise breaking. Subjects first make a promise decision (promise stage), then they anticipate whether the promise affects the interaction partner's decision (anticipation stage) and are subsequently free to keep or break the promise (decision stage). Findings revealed that the breaking of the promise is associated with increased activation in the DLPFC, ACC, and amygdala, suggesting that the dishonest act involves an emotional conflict due to the suppression of the honest response. Moreover, the breach of the promise can be predicted by a perfidious brain activity pattern (anterior insula, ACC, inferior frontal gyrus) during the promise and anticipation stage, indicating that brain measurements may reveal malevolent intentions before dishonest or deceitful acts are actually committed.