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Nicola Frignani Giovanni Ponti

LAboratory for Theoretical and EXperimental Economics Universidad de Alicante http://merlin.fae.ua.es/latex/. Risk vs Social Preferences under the Veil of Ignorance. Nicola Frignani Giovanni Ponti. UPV - 13/6/2008. LAboratory for Theoretical and EXperimental Economics

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Nicola Frignani Giovanni Ponti

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  1. LAboratory for Theoretical and EXperimental Economics Universidad de Alicante http://merlin.fae.ua.es/latex/ Risk vs Social Preferences under the Veil of Ignorance Nicola Frignani Giovanni Ponti UPV - 13/6/2008

  2. LAboratory for Theoretical and EXperimental Economics Universidad de Alicante http://merlin.fae.ua.es/latex/ Risk vs Social Preferences under the Veil of Ignorance Antonio Cabrales Nicola Frignani Raffaele Miniaci Giovanni Ponti UPV - 13/6/2008

  3. Motivation (1) • Risk vs. Inequality aversion (source: wikipedia.org): • The reluctance of a person to accept a bargain with an uncertain payoff rather than another bargain with a more certain, but possibly lower, expected payoff • The preference for fairness and resistance to inequitable outcomes. • Rawls (1971), Harsanyi (1977) and the VOI: • “…the welfare of each participant but having no partial bias in favor of any participant…”

  4. Motivation (2) • Procedural vs. Allocation Fairness: • Bolton et al. (2005): “…Our data indicate that choice behaviour is sensitive to procedural fairness: the opportunity for a fair procedure has much the same effect on the acceptability of a given allocation as does the opportunity to have a fair outcome, though random fair procedures also add risk components to the situation that may also affect behaviour…” • Is the Veil of Ignorance a Concept bout Risk? • Horish (2007): “…If people have social preferences they could be in favor of an egalitarian distribution even if they are risk neutral…” • Are People Inequality-Averse, or just Risk-Averse? • Carlsson et al. (2005): “The main finding in this paper is that (even under the veil of ignorance) many people appear to have preferences regarding equality per se. We have also found that both relative risk aversion and inequality aversion vary with sex and political preferences. On average, women and left-wing voters have higher parameter values for both relative risk aversion and inequality aversion.”

  5. Related Literature • Functional Identification: • Of RA and discounting: Harrison (08), Eckel (04) • Of “unconditional altruism”: Cox et al. (05,07,08) • Risk and inequality aversion (surveys): Amile & Cowell (07), Bosmans (03), Carlsson et al. (05) • Lotteries as fair mechanisms: Bolton et al. (05), Karni et al. (02, 07, 08) • Renewed debate on the VOI:Roemer et al. (05,07) • Experiments with the VOI: Horish (07), Levati et al (07)

  6. Assume the following hypothetical situation… • T1 • Phase1 • Player 1 :->

  7. …or the following … • T1 • Phase 1 • Player 2 :-<

  8. ST. 2: Player position randomly determined ST. 3: Agents choose b ST. 4: A random draw chooses the Dictator (i.e. STRATEGY METHOD) ST. 0:4 payoff pairs b are drawn at random T1: Control treatment (Cabrales et al., 2007) Payoffs • 24 rounds with changing option sets (constant across treatments) • Player position randomly determined and known in advance • Strategy method

  9. ST. 2: Player position FIXED ST. 3: Dictators choose b ST. 4: A random draw chooses the Dictator (i.e. NO STRATEGY METHOD) ST. 0:4 payoff pairs b are drawn at random T2: Fixing player position (Cabrales et al., 2007) Payoffs • Player position fixed and known in advance • Only Dictators choose (i.e. NO Strategy method)

  10. ST. 2: Player position randomly determined ST. 3: Agents choose b UNDER THE VEIL OF IGNORANCE ST. 0:4 payoff pairs b are drawn at random ST. 4: A random draw chooses the Dictator T3-1/2: VOI Payoffs • Player position randomly determined and not known in advance (VOI) • Strategy method in contract decision • T3-1: ex ante p=.5 • T3-2: p uniformly distributed in [0,1]

  11. ST. 2: Player position randomly determined ST. 3: Agents choose b UNDER THE VEIL OF IGNORANCE ST. 0:4 payoff pairs b are drawn at random T4-1/2: Lotteries Payoffs • Player position randomly determined and not known in advance (VOI) • NO PAYOFF CONSEQUENCES ON OTHERS • T4-1: ex ante p=.5 • T4-2: p uniformly distributed in [0,1]

  12. ST. 2: Player position randomly determined ST. 3: Agents choose b WITH NO INFO ON PL. ASSIGNMENT ST. 0:4 payoff pairs b are drawn at random T5-1/2: The “ambiguous” treatments Payoffs • Player position randomly determined as in T3-2/T4-2. • No info on the assignment protocol • T5-1: Dictator Game • T5-2: Lottery

  13. Envy Guilt ui 1-i 1+i i j Worse off Better off Fehr and Schmidt’s (1999) IAP

  14. =.5 • =.2 1 = 2 2 1 Fehr and Schmidt’s (1999) IAP • => >>0 => concave indifference curves

  15.  “F&S type” preferences: some alternatives • IAP: 0≤ ≤ 1;  ≥0; || ≥ || • ESP: 0 ≤  ≤.5; -.5 ≤ <0; || ≤ || • SSP: -1≤<0; 0 ≤  ≤ 1; || ≤ || • EP: = =0 ;

  16. T1: estimating FSP (Cabrales et al., 2007) • The majority of subjects falls in the IAP case, followed by SSP and ESP. • In many cases, the constraints on absolute values are violated • About 10% of our subject pool display both and  negative • For 20% we cannot reject the null hypothesis of EP.

  17. T2: estimating FSP (Cabrales et al., 2007) • Since in T2 subjects always play as Player 1 or Player 2, only one FS either  or  can only be identified. • Given this design constraint, FS distributional preferences are almost identical across treatments (both at the individual and the aggregate level)

  18. RA with many goods: a “conservative” approach” • Laffont (1989) on how to frame RA with many goods: • => In absence of uncertainty, MRS does not depend on RA

  19. Cox & Sadiraj’s (2005) model of “egocentric altruism”

  20.  •  Cox & Sadiraj’s (2005) model of “egocentric altruism” • => Even in absence of uncertainty, IA grows with RA

  21. The VOI case • => Cox & Sadiraj: • => Even in presence of uncertainty, IA grows with RA • => R&S with “cautious RA”: analytically unmnageable (so far)

  22. Maximum likelihood estimation of SPs and RPs • T1-2: • T3: • T4: • ML MLOGIT:

  23. Results I: Estimating FSP (=1) • In all treatments (but TR3-2) subjects exhibit IAPs where guilt predominates over envy. • In TR3-2, EPs prevail. Is this an instance that Harsanyi is right? • Since in T3-1 the VOI makes envy and guilt absolutely symmetric, only the sum can be identified (we fix =). Differences (between sums) across treatments are never significant. Is this an instance that F&S are right?

  24. Results II: Estimating FSP + RA • Risk aversion parameters are always significant • Social preferences are qualitatively consistent with constrained estimates • Lower RA in: • VOI (vs. Control) treatments • In lottery treatments

  25. Individual estimates (TR=5) • =>  and  are positively correlated with  • => Previous results are turned upside down

  26. Results III: social preferences and ambiguity (prel.)

  27. Results III: social preferences and ambiguity (prel.)

  28. Conclusions • Further research: • Robustness over functional specifications • Alternative working definition of RA • Treating “ambiguity” in a non-standard way • Removing VNM: • Weighting probabilities in a non linear way • If subjects do not max (expected) profits, (strategic) ambiguity is present in all treatments

  29. The End LAboratory for Theoretical and EXperimental Economics Universidad de Alicante http://merlin.fae.ua.es/latex/ latex@merlin.fae.ua.es

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