We demonstrate that a simple model, constructed on the premise that people are motivated by both their pecuniary payoff and their relative payoff standing, explains behavior in a wide variety of laboratory games. Included are games where equity is thought to be a factor, such as ultimatum, two-period alternating offer, and dictator games; games where reciprocity is thought to play a role, such as the prisoner’s dilemma and the gift exchange game; and games where competitive behavior is observed, such as Bertrand and Cournot markets, and the guessing game.

This paper uses a three-games (or triadic) design to identify trusting and reciprocating behavior. A large literature on single-game trust and reciprocity experiments is based on the implicit assumption that subjects do not have altruistic or inequality-averse other-regarding preferences. Such experimental designs test compound hypotheses that include the hypothesis that other-regarding preferences do not affect behavior. In contrast, experiments with the triadic design do discriminate between transfers resulting from trust or reciprocity and transfers resulting from other-regarding preferences that are not conditional on the behavior of others. Decomposing trust from altruism and reciprocity from altruism or inequality aversion is critical to obtaining empirical information that can guide the process of constructing models that can increase the empirical validity of game theory.

Who knows what I want to do? Who knows what anyone wants to do? How can you be sure about something like that? Isn't it all a question of brain chemistry, signals going back and forth, electrical energy in the cortex? How do you know whether something is really what you want to do or just some kind of nerve impulse in the brain. Some minor little activity takes place somewhere in this unimportant place in one of the brain hemispheres and suddenly I want to go to Montana or I don't want to go to Montana. (White Noise, Don DeLillo)

Abstract not found

Why do economists conduct experiments? To answer that question, it is first necessary briefly to specify the ingredients of an experiment. Every laboratory experiment is defined by an environment, specifying the initial endowments, preferences and costs that motivate exchange. This environment is controlled using monetary rewards to induce the desired specific value/cost configuration (Smith, 1991, 6). 1 An experiment also uses an institution defining the language (messages) of market communication (bids, offers, acceptances), the rules that govern the exchange of information, and the rules under which messages become binding contracts. This institution is defined by the experimental instructions which describe the messages and procedures of the market, which are most often computer controlled. Finally, there is the observed behavior of the participants in the experiments as a function of the environment and institution that constitute the controlled variables. Using this framework of environment, institution, and behavior, I can think of at least seven prominent reasons in the literature as to why economists conduct experiments. Undoubtedly, there are more (Davis and Holt, 1992, chapter 1 and passim).

During the last two decades economists have made much progress in understanding incentives, contracts and organizations. Yet, they constrained their attention to a very narrow and empirically questionable view of human motivation. The purpose of this paper is to show that this narrow view of human motivation may severely limit understanding the determinants and effects of incentives. Economists may fail to understand the levels and the changes in behaviour if they neglect motives like the desire to reciprocate or the desire to avoid social disapproval. We show that monetary incentives may backfire and reduce the performance of agents or their compliance with rules. In addition, these motives may generate very powerful incentives themselves.

of the process) for helpful comments. 1 Behavioral economics increases the explanatory power of economics by providing it with more realistic psychological foundations. This book consists of representative recent articles in behavioral economics. 1 This chapter is intended to provide an introduction to the approach and methods of behavioral economics, and to some of its major findings, applications, and promising new directions. It also seeks to fill some unavoidable gaps in the chapters ’ coverage of topics. What Behavioral Economics Tries To Do At the core of behavioral economics is the conviction that increasing the realism of the psychological underpinnings of economic analysis will improve economics on its own terms--generating theoretical insights, making better predictions of field phenomena, and suggesting better policy. This conviction does not imply a wholesale rejection of the neoclassical approach to economics based on utility maximization, equilibrium, and efficiency. The neoclassical approach is useful because it provides economists with a theoretical framework that can be applied to almost any form of economic (and even non-economic) behavior, and it makes refutable predictions. Many of these predictions are tested in the chapters of this book, and rejections of those predictions suggest new theories. Most of the papers modify one or two assumptions in standard theory in the direction of greater psychological realism. Often these departures are not radical at all because they relax simplifying assumptions that are not central to the economic approach. For example, there is nothing in core neoclassical theory that specifies that people should not care about fairness, that they should weight risky outcomes in a linear fashion, or that they must discount the future exponentially at a constant rate. 2 Other assumptions simply acknowledge human limits on 1 Since it is a book of advances, many of the seminal articles which influenced those collected here are not included, but are noted below and are widely reprinted elsewhere.

Abstract. In this paper, we empirically test for the influence of fairness considerations on the willingness to redistribute income in private and in democratic decisions. In contrast to standard explanations of income redistribution, our theory takes into account that prices shift decisively as we move from the sphere of private contributions to politics. At the polls, it is nearly costless to observe social norms. Therefore, we expect individuals to behave more fairly in the political sphere than in the market place. We present experimental evidence which is consistent with this hypothesis. In distributive struggles, social norms moderate the inclination of human beings to behave like ‘gangsters’. 1.

There is a growing interest in applying market mechanisms to tackle everyday communication problems such as communication interruptions and communication overload. Prior analytic proofs have shown that a signaling and screening mechanism can make senders and recipients of messages better off. However, these proofs make certain assumptions that do not hold in real world environments. For example, these prior works assume that there are no transaction costs in a communication market and that monetary incentives are the only motivators in communication between strangers. This research builds upon prior analytic work and empirically tests the validity of the claim that signaling and screening mechanisms will improve communication welfare. Our results show that while these types of markets can indeed improve communication welfare, a simpler, less expressive fixed-price market can lead to higher welfare than a more expressive, variable pricing and screening mechanism. Findings from this study also provide valuable insights for technology designs. For example, these results suggest the need to reduce cognitive overhead in using communication markets. Author Keywords Computer mediated communication, market mechanisms, empirical studies, economics ACM Classification Keywords H5.3. Information interfaces and presentation (e.g., HCI): Group and Organization Interfaces – computer supported cooperative work

: In this paper we report experimental results that relate to the reciprocity experiment of Berg, Dickhaut, and McCabe (1995). We consider direct reciprocity, which means to respond in kind to another person, and indirect reciprocity, understood as rewarding someone else. Another variation concerns the information about the multiplier of donations where we compare the benchmark case with a commonly known multiplier to a condition where the multiplier is known with certainty only to donors. Questions which we try to answer are: Will indirect reciprocity induce higher or lower donations?, will donors with the high multiplier "hide behind the small one?", how do receivers respond to different situations? JEL codes: C72, C92 Key words: Trust, reciprocity, experiment, game * This paper was conceived while we were all at or visiting the CentER for Economic Research at Tilburg University. We thank Harmut Kliemt for his encouraging and inspiring comments. Martin Dufwenberg and Eric van Dam...