Chapter 1. Other-regarding preferences.

Usually, economic models assume that subjects are completely selfish when they
make their decisions. This is not true for everybody. There are many examples in real
life about people behaving accordingly to fairness or altruistic criteria.
In this chapter we will study two models that deal with this issue, that is, these models
take into account that subjects not only pursue their material self interest but also they
care about social goals per se.
1.1 Fehr-Schmidt model (1999)
1.1.1

Some examples

a) The Ultimatum Game (UG)

In this game a proposer and a responder will bargain about the distribution of some
amount of money. Lets normalize the total amount of money to 1. The responders
share is denoted by s and the proposers share is denoted by (1-s).
In the first stage of the game, the proposer offers a share (s) to the responder. In the
second stage of the game the responder can accept or reject the offer. If the responder
accepts the offer, then she will earn s and the proposer will earn (1-s). If the responder
rejects the offer, then both players earn 0.
Assuming selfish preferences, the responder would accept any offer above 0.
Anticipating that, the proposer would offer a share very close to 0 (we could say 0
plus some amount ). However, results in different experiments show that there are
almost no offers above 50% and below 20%. It has been also shown that low offers
are usually rejected. Anyway, these results depend on several factors such as gender
or the country in which the experiment is run.

b) The Public Goods Game (PGG)

In this game there are a number of agents (n2) who have to decide how much they
are going to contribute to a public good. Each subject has an initial endowment of y
and they decide the proportion of this endowment (x) they will put into a public
account. The payoffs are as follows:
!

! ! , , ! = ! +

!
!!!

1
< < 1

a denotes the marginal return from the public good.

Assuming selfish preferences, the Nash equilibrium of this game is to contribute zero
to the group account. However, in the PGG, depending on the parameters,
contributions are not always zero (this results does not support the NE prediction).
1.1.2

The model

Consider a set of n players indexed by i {1,,n} and let x= x1, , xn denote the
vector of monetary payoffs. The utility function of player i {1,,n} is given by:

! = ! !

1
1

max ! ! , 0 !
!!!

1
1

max ! ! , 0
!!!

In this model we assume that ! ! and 0 ! < 1

For the two-players game, we have the following utility function.
! = ! ! max ! ! , 0 ! max ! ! , 0
In both models, ! measures the disutility the subject has when she is behind her
partner. In the same line, ! represents the disutility coming from advantageous
inequality.

1.1.3

Applications of the model

We start by applying our model to the Ultimatum Game. Imagine an offer made by
the proposer which consists on s=0.1 and (1-s)=0.9.
Assuming selfish preferences, that is,
! = !
the responders utility function of accepting and rejecting the offer would be:

!"#$%&'"( = !"#$%&'"( 0.1, 0.9 = 0.1

!"#$%&'"( = !"#$%&'"( 0, 0 = 0
so, the responder should accept the offer.
If we take into account the preferences represented by the F-S model, the responders
utility function of accepting and rejecting the offer would be
!"#$%&'"( = !"#$%&'"( 0.1, 0.9
= 0.1 ! max 0.9 0.1,0 ! max 0.1 0.9,0
= 0.1 0.8!
!"#$%&'"( = !"#$%&'"( 0, 0 = 0
Should the responder accept the offer or should she reject it? It clearly depends on the
value of !
If !"#$%&'"! !"#$%&'"( , the responder should accept the
offer, otherwise, the responder should reject it.

1.2 Charness and Rabin model (2002).

In the same line of the previous model, Charness and Rabin propose a range of
experiments in order to test models of social preferences.
1.2.1

The model

Let xA and xB be Player As and Player Bs payoffs, respectively. Consider the

following formulation of Player Bs preferences.
! ! , ! = + + ! + 1 !
where:
r=1 if xB>xA and r=0 otherwise
s=1 if xB<xA and s=0 otherwise
q=-1 if A has misbehaved and q=0 otherwise
So, Player Bs utility depends on both Player Bs and Player As payoffs. Parameter
models reciprocity and and allow for a range of distributional preferences.
If we assume that 0, then we are assuming that Player B has competitive
preferences. That is, people like their payoffs to be high relative to others payoffs.
If we assume that < 0 < < 1 we are assuming difference aversion preferences.
These preferences assume that people prefer to minimize disparities between their
own monetary payoffs and those of other people.
If we take 0 < 1, then subjects always prefer more for themselves and the
other person, but are more in favor of getting payoffs for themselves when they are
behind than when they are ahead.