Interdependent Preferences and Reciprocity
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ju05_Article 2 6/10/05 1:40 PM Page 392 Journal of Economic Literature Vol. XLIII (June 2005), pp. 392–436 Interdependent Preferences and Reciprocity ∗ JOEL SOBEL 1. Introduction I pay particular attention to how reciproc- ity influences decision making. Reciprocity uch of economic analysis stems from the refers to a tendency to respond to perceived joint assumptions of rationality and indi- M kindness with kindness and perceived mean- vidual greed. Common sense and experimen- ness with meanness and to expect this tal and field evidence point to the limits of this behavior from others. I introduce models of approach. Not everything of interest to econ- intrinsic reciprocity in section 3.4. omists can be well understood using these Intrinsic reciprocity is a property of prefer- tools. This paper reviews evidence that narrow ences. The theory permits individual prefer- conceptions of greed and rationality perform ences to depend on the consumption of badly. The evidence is consistent with the view others. Moreover, the rate at which a person that economic incentives influence decision values the consumption of others depends making. Hence there is a role for optimizing on the past and anticipated actions of others. models that relax the assumption of individual An individual whose preferences reflect greed. I discuss different ways in which one intrinsic reciprocity will be willing to sacri- can expand the notion of preferences. fice his own material consumption to increase the material consumption of others ∗ Sobel: University of California, San Diego. I present- in response to kind behavior while, at the ed a version of this paper at the First World Congress of same time, be willing to sacrifice material the Game Theory Society and to my colleagues at the consumption to decrease someone else’s Center for Advanced Study in the Behavioral Sciences. I thank Eli Berman, Antonio Cabrales, Miguel Costa- material consumption in response to unkind Gomes, Vincent Crawford, David M. Kreps, Herbert behavior. Gintis, Mark Machina, Efe Ok, Luís Pinto, Matthew It is more traditional to view reciprocity as Rabin, Paul Romer, Klaus Schmidt, Uzi Segal, Joel Watson, and Kang-Oh Yi for discussions, references, and the result of optimizing actions of selfish comments. I am especially grateful to two referees who agents. Responding to kindness with kind- supplied detailed, intelligent, and constructive comments ness in order to sustain a profitable long- on an earlier version of the manuscript and to John McMillan for his advice and encouragement. I worked on term relationship or to obtain a (profitable) this project while a Fellow at the Center for Advanced reputation for being a reliable associate are Study in the Behavioral Sciences. I thank my classmates at examples of instrumental reciprocity. the Center for conversations and encouragement and the Center for financial and clerical support. NSF funding is Economics typically describes instrumental also gratefully acknowledged. reciprocity using models of reputation and 392 ju05_Article 2 6/10/05 1:40 PM Page 393 Sobel: Interdependent Preferences and Reciprocity 393 repeated interaction. This approach is quite introduce and motivate the ideas I review in powerful as essentially all exchanges in natu- the manuscript. ral settings can be viewed as part of some 2.1 Descriptions long-term interaction. Consequently one could argue that the models of section 3.4 There are several ways to react to Paul’s are unnecessary. This essay presents the destructive activity. One response is to treat it counterargument that models of intrinsic as an emotional response not subject to eco- reciprocity can provide clearer and more nomic analysis. We should not give up so eas- intuitive explanations of interesting econom- ily. Paul may be crazy, but his former boss, ic phenomena. An openness to the possibili- Marsha, probably is not. Unless Paul’s actions ty of intrinsic reciprocity leads to a new and are completely unrelated to the environment, useful perspective on important problems. Marsha will want to understand how to The next section contains a stylized exam- reduce the chance of adverse behavior. ple that illustrates the limitations of standard Marsha may need to hire lawyers or psychi- models. I use the example to provide an atric consultants (instead of economists) to tell informal introduction to alternative theoret- her how to deal with Paul or reduce the risk of ical approaches and motivate the paper. costly outbursts by employees, but she should Section 3 introduces these models formally. evaluate her options using economic models. Section 4 describes some economic settings I will concentrate on descriptions that are in which the modeling approaches of section consistent with the hypotheses of optimiza- 3 may be particularly useful. Section 5 tion and equilibrium. Once we allow that reviews literature on the evolution of prefer- Paul maximizes something more that his own ences. Section 6 responds to stylized argu- monetary reward, there are many stories like ments against the approach and section 7 is this available. This section introduces some a conclusion. potential descriptions informally. Section 3 provides a more systematic treatment. 2. An Informal Guide to the Concepts 2.1.1 Static Income Maximization We regularly read accounts of dissatisfied Hypothesis. The narrowest version of or recently fired employees destroying prop- economic theory assumes that Paul seeks to erty, sabotaging computer files, or even maximize his utility and that his utility “going postal” and killing people at their depends on the quantities of the private workplace. The sense of outrage at an appar- material goods he consumes. In static ent injustice is real. Many people are willing income maximization, Paul balances the to take destructive actions as part of the out- immediate cost and benefits of actions rage. This kind of destructive behavior is rather than the long-term implications of unlikely to be in the material interest of a these decisions. In simple settings, this fired employee: it takes time, it is not com- hypothesis reduces to the assumption that pensated, and it carries the risk of criminal Paul maximizes his monetary income. penalties. How should we think about it? Analysis. Paul would carry out his For concreteness, imagine that Paul was a destructive action only if he imagined that it high-ranking executive who had worked for would lead to direct material gain. It is hard a company for more than ten years. He lost to rationalize Paul’s behavior under these his job when business turned bad. On his last assumptions. His actions may advance his day on the job, Paul destroyed vital company immediate material interests if Marsha gives documents and continued to sabotage com- him back his job or if he receives a payment puter files until he was caught six months to stop sabotaging the company, but a more later. In this section, I will use Paul’s story to elaborate description seems necessary. ju05_Article 2 6/10/05 1:40 PM Page 394 394 Journal of Economic Literature, Vol. XLIII (June 2005) 2.1.2 Interdependent Preferences security. By hurting Marsha, Paul gains because he positions himself to get another Hypothesis. Paul maximizes a utility job (which he may be less likely to lose) or sell function that depends on Marsha’s consump- a book about his experiences. Under these tion of material goods in addition to his own. circumstances, Paul may have preferences Analysis. If Paul’s utility is decreasing in defined over both his monetary wealth and the material wealth of Marsha, then Paul will his “sense of honor.” If the preferences are be willing to sacrifice his own material well increasing in both arguments, then he will be being to punish Marsha. These preferences willing to make material sacrifices in order to explain why Paul would wish to harm increase in honor. If Paul only cares about Marsha, but do not explain why he waits honor because it enables him to increase his until after he is fired to do so. There are two monetary payoff, then this explanation possibilities. In the midst of an ongoing reduces to income maximization. employment relationship, Paul does not Another possibility is that Paul takes pleas- harm Marsha because he fears that Marsha ure directly from the act of sabotage. That is, will fire him, which would be a sufficiently his preferences contain an additional argu- great punishment to deter him from hurting ment (“sabotage”). Paul will not maximize Marsha. his material payoff, but he is selfish and goal Alternatively, the marginal rate of substi- oriented. This explanation does not explain tution between Paul and Marsha’s material why Paul turns to sabotage only after he was income in Paul’s preferences may change as fired. Perhaps the advantage of maintaining a result of Paul’s termination. The impover- the employment relationship deterred his ished Paul is willing to sacrifice to make urge to destroy files until he was fired, but Marsha worse off. This explanation only this explanation suggests that the sabotage works if Paul’s income after being fired is levels would be the same whether the lower than after a voluntary separation (oth- employee was fired or separated voluntarily. erwise any separation would trigger Paul’s disruptive behavior). 2.1.4 Intrinsic Reciprocity For the example, it makes sense to assume Hypothesis. Paul’s utility depends on the that Paul’s utility is decreasing in Martha’s material wealth of Marsha. Moreover, Paul’s income. The interdependent preference perception of Marsha’s behavior determines approach permits Paul to be willing to sacri- the direction of Paul’s preferences. The mar- fice material welfare to decrease the income ginal utility of Paul with respect to an of others. increase in Marsha’s income increases when 2.1.3 Preferences over General Marsha is kind to Paul and decreases when Consumption Goods Marsha is unkind.