These preferences are independent of fairness or unfairness shown by the other agents. However, these preferences are not very extensively documented or studied and are less important than say reciprocal behavior in the experimental field Fehr and Fischbacher, The above explained social preferences have been studied by using various experimental designs. Different designs are used to test different kinds of preferences.
These designs work on the game theoretical idea of sub-game perfect Nash equilibrium which is achieved when the behavior of the participants is driven by self-interest. A behavior deviating from this equilibrium is explained as being driven by non-selfish preferences. The basic structure of major experimental designs is explained below. All of these experiments have been used with some or the other form of variation to study various kinds of social preferences.
Dictator Game: One problem which is said to be associated with the ultimatum game is that a deviating motive can also be interpreted as that of risk aversion. Therefore, similar in design, a dictator game also consists of two players player 1- proposer, player 2- respondent between whom a sum of money is to be divided. However, here the respondent is not given the choice of rejecting any offer extended by the proposer. Ultimatum Game: A form of a bargaining game, this is a two-player game wherein a sum of money is to be divided between Player 1 proposer and Player 2 responder.
The proposer is given the task of deciding on an offer regarding how money to divide between the two which is then accepted or rejected by the responder. In case of acceptance, both the players end up having the offered sum of money and in case of rejection, none of the players end up with any sum of money. To give an example, giving an offer and it being accepted is the sub-game perfect Nash equilibrium. Deviations from this equilibrium have been interpreted as social preferences of inequality aversion, reciprocity negative , and altruism Croson and Gneezy, Trust Investment Game: To measure trust and trustworthiness, in this sequential two player game player 1 is endowed with a sum of money, some or all of which can be transferred to player 2.
Player 2 then, can keep this entire multiplied sum of money or pass any amount back to Player 1. Here, participants are given with some endowment along with the option of allocating it towards their own private consumption or towards the consumption of the group. Presenting a social dilemma, the endowment is of more value if consumed privately but generates social efficiency in case of group consumption. The sub game perfect Nash equilibrium is to contribute nothing for social consumption, a deviation from which is interpreted as an altruistic motive Croson and Gneezy, The existing knowledge about how social preferences develop is attributable to two streams of thought i.
Not only do they explain social preferences at the individual level but also gender differences in these preferences.
That is, say the degree of trust and reciprocity may vary from person to person or group to group, it may also vary according to gender. According to Eagly and Wood , p. While, a part of the literature argues in favor of nature in influencing social preferences as well as the gender difference in social preferences, this essay lays more focus on the literature on nurture. Fehr , suggests that social preferences are driven by ethnic and cultural differences. On similar lines Guiso et al , put forward religion as being one of the determinants of trust.
Zak and Knack , find that trust is higher in more egalitarian societies, and in societies in which the social distance between agents is smaller. Berg et al , find that more information regarding social history increase the likelihood of agents showing reciprocity. Socio cultural factors and related determinants lead to the internalization of certain behaviors which translate into different types and degrees of social preferences in individuals. Social norms and societal structures also define gender specific roles which basically form a gender gap in social preferences.
Croson and Gneezy , conducted a review of the literature on social preferences to identify gender differences. They found that sometimes women are more altruistic, inequality averse, trusting and trustworthy than men and sometimes it is the other way around.
Though, gender differences in social preferences exist, there is heterogeneity in this gap which can be attributed to the differing social norms and cultures.
Other than nurture , research has attempted to link the genetic-make up of individuals with social preferences Cesarini et al, And, the view that it is ultimately the socio-cultural determinants or their interplay with genetic makeup that affect social preferences has been quite strongly dominating experimental practice. As opposed to the conventional over-simplified assumption of self-interested individuals, strong evidence points towards the presence of heterogeneous other-regarding preferences in agents.
Incorporating social preferences — specifically, trust and reciprocity - and recognizing the non-constancy of these preferences across individuals can help models better represent the reality. The benefit of adopting the social preference framework is not only limited to economic modelling. Research suggests a strong linkage between the behaviors of trust and reciprocity and economic growth, reduction in the cases of default in cash transfer programs and group lending and saving programs and increasing financial inclusion, and in increasing the effectiveness of governments and central banks Knack and Keefer, ; Karlan, ; Bachas et al, They are also known to lead to increasing returns on human and physical capital by increasing educational attainment, public health outcomes and total factor productivity Knack and Keefer, ; Gilson, ; Rocco et al, Trust and reciprocity have been positively related with international trade and investment, and innovation Narayan and Pritchett, ; Zak and Knack, ; Guiso et al, The functioning of these preferences is such that, if all transactions and markets are forms of contracts then with them come the issues of enforceability, imperfect knowledge and market failure.
The preferences in questions are known to decrease the likelihood of market failures and also reduce transaction costs. It can be said that recognising social preferences through modelling and also framing policies accordingly can pave the new road towards development. If trust and reciprocity are to be focused on, then societies can take measures to increase the degree of these preferences by increasing the flow of information, transparency and accountability. Societies can also formulate policies which exploit these preferences such as, introducing and expanding micro-finance programs.
These programs are specifically very beneficial for the less developed economies. According to Besley and Coate , micro-financial setups, along with reducing the asymmetric information gap impose a sense of interdependence upon its beneficiaries. Ripple effects include greater financial coverage and inclusion, increased access to credit, increased investment in education and health care, and important welfare effects such as reduced consumption of alcohol and tobacco Karlan, ; Bachas et al, As mentioned previously, social preferences also vary across gender.
However, this variance is a function of the societal structures and norms according to some it is because of the gender difference in genetic make up. The very fact that a gender difference exists is enough to change the direction of policy formulation. Ranehill and Weber , show that a gender difference in preferences translate into a gender difference in policy preferences.
That is, women tend to prefer a different set of policies than men. Therefore, societies can take advantage of the gender gap in social and policy preferences and increase the decision-making power of women through quotas and reservations to change the flow of resources towards areas which women prefer. This can help bring about-the much required and sought after-gender equity. This could directly lead to women empowerment which is helpful for economic development.
In fact, women empowerment and economic development share a bi-directional causal relationship World Bank, ; Duflo, Andreoni, James. Journal of Political Economy 97 6 : University of Chicago Press. Bachas, Pierre et al. Games and Economic Behavior 10 1 : Elsevier BV. Journal of Development Economics 46 1 : Caiani, Alessandro et al.
Journal of Economic Dynamics and Control : Cesarini, David et al. Quarterly Journal of Economics 2 : Handbook of Experimental Economics Results 2. Cox, James C. Journal of Economic Literature 47 2 : American Economic Association.
Dawid, Herbert et al. Dickhaus, Thorsten. Atomium Culture. Duflo, Esther. Journal of Economic Literature 50 4 : Eagly, Alice H. Perspectives on Psychological Science 8 3 : SAGE Publications. Population and Development Review 38 1 : Fehr, E. The Quarterly Journal of Economics 3 : Fehr, Ernst. Gilson, Lucy. Evidence of gendered norms from a slum in Nairobi, Kenya". Economic Inquiry 46 1 : Karlan, Dean S.
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