Interdependent Preferences and Reciprocity

Abstract

Experiments, ethnography, and introspection provide evidence economic agents do not act to maximize their narrowly defined self interest. Expanding the domain of preferences to include the utility of others provides a coherent way to extend rational choice theory. There are two approaches for including extended or social preferences in strategic models. One posits that agents have extended preferences, but maintains the conventional assumption that these preferences are stable. Prominent examples of this approach permit agents to exhibit concern for status, inequality, and social welfare. The other approach permits the strategic context to determine the nature of individual preferences. Context-dependent preferences can capture the possibility that agents are motivated in part by reciprocity. They may sacrifice personal consumption in order to lower the utility of unkind agents or to raise the utility of kind agents. This paper surveys the evidence in favor of social preferences and describes the implications of the leading theoretical models of extended preferences. It presents behavioral assumptions that characterize different types of social preferences. It investigates the extent to which social preferences may arise as the limit of evolutionary processes. It discusses the relationship between norms of reciprocity and social preferences in repeated interactions.

Context and interpretation in laboratory experiments: The case of reciprocity

“…Tables 7 and 8 The dominant approach to explain pro-social actions is to model agents as having (conditional or unconditional) other regarding preferences. Heterogeneities across agents are captured by allowing for differences in one or more preference parameters and assuming that the distribution of these parameters is common knowledge among the agents (for example, Levine 1998;Fehr and Schmidt, 1999;Bolton and Ockenfels, 2000;Sobel, 2005). Other researchers additionally allow for differences in prior beliefs in the specification of types of agents (Ellingsen and Johannesson, 2008).…”

Strategic Choice of Preferences: The Persona Model

“…Perhaps the most prominent example of a behavioral preference model is the work on interdependent / other-regarding / social preferences (Sobel, 2005;Bergstrom, 1999;Kockesen et al, 2000). In that work, both the underlying and the behavioral preferences are formalized as expectations of von Neumann -Morgenstern utility functions.…”

Instincts and institutions: the rise of the market

“…Numerous experimental studies have suggested that human beings care about the welfare of others and about what others think of them (see Fehr & Schmidt 1999, Sobel 2005. 23 The desire for esteem can help to resolve the problem of trust and cooperation in the type of sequential exchange we have been considering.…”