We demonstrate that a simple model, constructed on the premise that people are motivated by both their pecuniary payoff and their relative payoff standing, organizes a large and seemingly disparate set of laboratory observations as one consistent pattern The model is incomplete information but nevertheless posed entirely in terms of directly observable variables The model explains observations from games where equity is thought to be a factor, such as ultimatum and dictator, games where reciprocity is thought to play a role, such as the prisoner's dilemma and gift exchange, and games where competitive behavior is observed, such as Bertrand markets (JEL C78, C90, D63, D64, H41)

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ERC: A Theory of Equity, Reciprocity, and Competition

With the publication of The Logic of Collective Action in 1965, Mancur Olson challenged a cherished foundation of modern democratic thought that groups would tend to form and take collective action...

/pdf/collective-action-and-the-evolution-of-social-norms-39il4hoxmh.pdf

Collective Action and the Evolution of Social Norms

This article discusses the economic implications of reciprocity. A long-standing tradition in economics views human beings as exclusively self-interested. In most economic accounts of individual behavior and aggregate social phenomena, the vast forces of greed are put at the center of the explanation. However, many people deviate from purely self-interested behavior in a reciprocal manner. Reciprocity means that in response to friendly actions, people are frequently much nicer and much more cooperative than predicted by the self-interest model; conversely, in response to hostile actions they are frequently much more nasty and even brutal. There is considerable evidence that a substantial fraction of people behave according to this dictum: People repay gifts and take revenge even in interactions with complete strangers and even if it is costly for them and yields neither present nor future material rewards. This notion of reciprocity is thus very different from kind or hostile responses in repeated interactions that are solely motivated by future material gains.

/pdf/fairness-and-retaliation-the-economics-of-reciprocity-3kli7g3xjv.pdf

Fairness and Retaliation: The Economics of Reciprocity

In recent years, there has been a steadily increasing interest on the part of economists in happiness research. We argue that reported subjective well-being is a satisfactory empirical approximation to individual utility and that happiness research is able to contribute important insights for economics. We report how the economic variables income, unemployment and inflation affect happiness as well as how institutional factors, in particular the type of democracy and the extent of government decentralization, systematically influence how satisfied individuals are with their life. We discuss some of the consequences for economic policy and for economic theory.

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What can economists learn from happiness research

https://www.econ.uzh.ch/dam/jcr:ffffffff-9758-127f-0000-00003449356a/ArePeopleCondCooperative.pdf

Are people conditionally cooperative? Evidence from a public goods experiment

Zero-Knowledge Cooperation in Dilemma Games

Institutions change—in Iraq, the formerly Communist countries, and many private and public organizations. But do people adapt to the new institutional environment, and if so, how quickly? This paper examines institutional change—how long it takes people to transition from one institutional environment to another or, put differently, whether old institutional regimes have an afterglow. More specifically, we study whether trust and trustworthiness can be fostered by first exposing people to an environment conducive to trust. We are interested in whether (intrinsic) trust and trustworthiness can be induced in the long run by providing extrinsic incentives for trust and trustworthiness in the short run. Reputation systems may provide incentives for trustworthiness and trust. Direct reputationbuilding may occur in repeated games where pairs of subjects play the same stage game repeatedly, but repeat transactions are not necessarily the rule in today’s global economy. In population games where agents are randomly re-matched in every period, indirect reputation systems are a potential substitute for personal interactions—provided information about others’ past behavior is available. On eBay, for example, buyers are willing to pay a premium of 8.1 percent of the selling price to a seller with an established good reputation (Paul Resnick et al., 2003). This paper examines experimentally to what degree indirect reputation-building substitutes for direct reputation-building in repeat interactions in the short run and analyzes the effects these environments have on behavior in the long run. In contrast, most earlier experimental studies focus on one-shot and repeat interactions in the short run. We compare the effects of direct and indirect reputation-building in a binary-choice trust game where a buyer (the trustor) can either interact with the seller (the trustee) or exit. The trustee can either honor or exploit trust. The payoffs are such that a money-maximizing trustee prefers exploiting to honoring trust in a one-shot game, while a money-maximizing trustor prefers not offering trust to being exploited. The unique Nash equilibrium of the single-shot game predicts no trade. Figure 1 presents the game we implemented with the actual payoffs in cents used. In our experiment, subjects participate in the trust game in two blocks of 10 rounds each, which is common knowledge. In phase 1, the first 10 rounds, they are confronted either with a standard, “one-shot” random matching treatment (“stranger” or “S”); a fixed-pairs, finitely repeated game treatment (“partner” or “P”); or * Bohnet: Kennedy School of Government, Harvard University, 79 JFK Street, Cambridge, MA 02139 (e-mail: Iris_Bohnet@Harvard.edu); Huck: Department of Economics and ELSE, University College London, Gower Street, London WC1E 6BT, United Kingdom (e-mail: s.huck@ucl. ac.uk). We thank Rachel Croson and the participants at the 2004 ASSA meetings for their helpful comments and Jeffrey Bielicki for his excellent research assistance. We gratefully acknowledge financial support from the Russell Sage Foundation, the Leverhulme Trust, and the Economic and Social Research Council (U.K.) via ELSE. 1 For a recent survey, see James Andreoni and Rachel Croson (2004). Studies examining the effects of different institutional environments over time include Bohnet et al. (2001) and Ernst Fehr and Simon Gachter (2003). 2 The experiments were computerized using Urs Fischbacher’s (1999) z-tree software. The instructions are available upon request.

Repetition and Reputation: Implications for Trust and Trustworthiness When Institutions Change

http://www.econ.msu.edu/papers/Averting%20Economic%20Collapse.pdf

Averting Economic Collapse and the Solipsism Bias

To commit or not to commit

Repeat transactions are not necessarily the rule in today's global economy. Indirect reputation systems, where buyers base their decisions on a seller's previous interactions with other buyers, are a potential substitute for personal interactions - provided such information is available. This paper examines experimentally to what degree indirect reputation building substitutes for direct reputation building in repeat interactions in the short run and analyzes the effects these environments have on behavior in the long run. We find that repeat interactions are the most effective institutional arrangement to foster trust and trustworthiness in the short and in the long run.

/pdf/repetition-and-reputation-implications-for-trust-and-22jzkzl0td.pdf

Steffen Huck

Papers

Zero-Knowledge Cooperation in Dilemma Games

Repetition and Reputation: Implications for Trust and Trustworthiness When Institutions Change

Averting Economic Collapse and the Solipsism Bias

To commit or not to commit

Repetition and Reputation: Implications for Trust and Trustworthiness in the Short and in the Long Run