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.

/pdf/what-can-economists-learn-from-happiness-research-tp056e628i.pdf

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

We propose a model in which mergers exert a more pronounced effect on the structure of a market than simply reducing the number of competitors. We show that this may render horizontal mergers profitable and welfare-improving even if costs are linear. The results help to reconcile theory with various empirical findings on mergers.

https://www.econstor.eu/bitstream/10419/62261/1/723750815.pdf

Profitable horizontal mergers: A market structure-oriented view

We propose a dynamic model of neighbourhood watch schemes. While the state chooses punishment levels, apprehension of criminals depends on the watchfulness of citizens. We show that, contrary to standard intuition, crime levels can increase in punishments. This is because neighbourhood watch schemes can fall victim to their own success if recruitment of new members is driven by fear of crime – a finding that is in line with the empirical literature. We discuss the policy implications of this result and show how it extends to the more general problem of norm enforcement among interacting citizens.

The dynamics of neighbourhood w atch and norm e nforcement

We study a society of agents where individual incentives conflict with collective ones and thus individual utility maximization leads to inefficient outcomes. We assume that there is no functioning central institution which can control individual behavior. Instead, we analyze a system of what we call local control (LC), where the enforcement of punishment lies in the hands of individuals in the society rather than in the hand of a central institution. The mechanism that governs the spread of control is the educational impact on an agent being controlled by some other agent, where we distinguish between executed and threatened punishment. Agents maximize their payoffs and underlie a constant drift towards not controlling others anymore. Our main results show that LC can survive if the educational impact of control is strong enough relative to the drift. If the educational impact of control is too weak LC breaks down. Moreover, there exists a non{monotonic punishment effect that sets a trap for standard legal policy advices.

Local Control: An Educational Model of Private Enforcement of Public Rules

In a large-scale natural field experiment, we partnered with a microlending company in Kyrgyzstan that asked over 180,000 of its clients for donations to social projects as a form of corporate philanthropy. In a 2 × 2 design, we explored two main (preregistered) hypotheses about giving by the poor. First, based on a conjecture that the poor are more price sensitive than the rich and in contrast to previous studies, we hypothesize that matching incentives induce crowding in of out-of-pocket donations. Second, we hypothesize that our population cares about their proximity to the charitable project. We find evidence in favor of the former hypothesis but not the latter. Previous studies of charitable giving focus on middle- or high-income earners in Western countries, neglecting the poor, although the lowest-income groups are often shown to contribute substantial shares of their income to charitable causes. Our results challenge the evidence in the extant literature but are in line with our theoretical model. The implications for fundraising managers are that the optimal design of fundraising campaigns crucially depends on the targeted groups and that donation matching is successful in stimulating participation in poorer populations. This paper was accepted by Yan Chen, behavioral economics and decision analysis. Funding: Financial support was from the Deutsche Forschungsgemeinschaft [Grant 280092119] and the Schweizerischer Nationalfonds zur Förderung der Wissenschaftlichen Forschung [Grant 100018_189152]. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4702 .

Charitable Giving by the Poor: A Field Experiment in Kyrgyzstan

In a heterogeneous duopoly market sellers can maximize any (quadratic and concave) conjectural profit function. True profits, however, decide which conjectural beliefs become more frequent. There exists a manifold of neutrally stable conjectural profit functions in the form of monomorphisms (all individuals have the same conjectural profits). The true profit function is, however, never stable as a conjectural one. In general, the price effects of stable constellations depend on both, whether sellers believe the products to be substitutable or complementary, and whether the products are really substitutes or not. By imposing limit evolutionary stability the manifold of neutrally stable conjectural profit functions collapses to just one of the neutrally stable constellations. JEL Classification C7, L2

Steffen Huck

Papers

Profitable horizontal mergers: A market structure-oriented view

The dynamics of neighbourhood w atch and norm e nforcement

Local Control: An Educational Model of Private Enforcement of Public Rules

Charitable Giving by the Poor: A Field Experiment in Kyrgyzstan

On the Evolutionary Stability of Profit Maximization