Social Norms as a Social Exchange

SIMON GÄCHTER and ERNST FEHR*

I. INTRODUCTION

«People's behavior can largely be explained in terms of two dominant interests: economic gain and social acceptance. » John Harsanyi «We are pleased to think that we have rendered ourselves the natural objects of approbation, though no approbation should ever actually be bestowed upon us; and we are mortified to reflect that we have justly merited the blame of those we live with, though that sentiment should never actually be exerted against us. » «We expect less sympathy from a common acquaintance than from a friend. We expect still less sympathy from an assembly of strangers.» Adam Smith The Theory of Moral Sentiments There are norms against cheating and lying, against and in favour of (VEBLEN, 1899), norms of belonging to clubs, political parties, peer groups and unions (AKERLOF, 1980; BOOTH, 1985; NAYLOR, 1989; CORNEO 1995, KANDEL and LAZEAR, 1992), norms that restrict production under piece rate regimes (ROETHLISBER- GER and DICKSON, 1947; WHYTE 1955) and against overusing common pool resources (OSTROM, 1992). A particularly important class of norms is related to collective action problems (ELSTER, 1989; OPP, 1996). In our views there can, thus, be little doubt that human behaviour is shaped by social norms. It seems equally obvious to us that such norms also have important economic consequences. Take for example the norm against cheating and lying. The economic theory of contracts and of principal-agent relations

* Institute for Empirical Research in Economics, University of Zürich, Blümlisalpstrasse 10, CH-8006 Zürich, Switzerland, Fax: +41-1-3640366, E-mail: gaec/iter@ iew.unizh.cn, /COLIN CAMERER, CATHERINE ECKEL, , , BRUNO S. FREY, , ED GLAESER, WERNER GÜTH, CHIP HEATH, CLAUDIA KESER, CHRISTIANE KMENT, MARC KNEZ, DAVID LAIBSON, , FELDC OBERHOLZER, PAUL ROMER, EKKEHART SCHLICHT, DAGMAR STAHLBERG, DICK THALER and participants at seminars in Berlin, Caltech, Chicago, Gerzensee, Linz, Karlsruhe, Paris, Vienna and Wisconsin for helpful comments.

Swiss Journal of Economics and Statistics 1997, Vol. 133 (2/2), 275-292 276 GÄCHTER/FEHR

assumes that agents cheat and lie whenever this provides an advantage to them. Under conditions of asymmetric information many mutually beneficial contracts will, therefore, not be concluded because the parties expect that these contracts will not be fulfilled. If, however, there exists a norm that restricts cheating and lying the contracting parties can, in general, reap much higher gains from trade. In FEHR and GÄCHTER (1996) and FËHR, GÄCHTER and KIRCHSTEIGER (1996) we provide strong evidence that the impact of norm-governed behaviour on contract enforcement may indeed give rise to large effi­ ciency gains. Norms constitute constraints on individual behaviour beyond the legal constraints and the market constraints usually considered by economists. For some purposes it may be useful and legitimate to assume the existence of a social norm to explain behaviour, that is, to take social norms as exogenously given. At a deeper level it is, however, desirable to explain or derive the existence of norms from more primitive concepts. Such an explanation does not only allow a better understanding of how the norm affects individual and aggregate behaviour and how the norm changes in response to variations in the environment. Deriving social norms from individual actions and beliefs is also a desirable enterprise for methodological reasons. Norms are a macro-level phenomenon that is constituted by individual actions and beliefs. Norms do not only shape and constrain individual actions and beliefs. They are also constituted by individual actions and beliefs. A complete theory of social norms thus has to explain how norms are constituted by individual actions and beliefs and how they, in turn, affect those actions and beliefs. The aim of this paper is to provide such a microfoundation for social norms and to subject the theory to an experimental test. Our contribution is based on the following definition of a social norm: It is (i) a behavioural regularity that is (ii) based on a socially shared belief how one ought to behave which triggers (iii) the enforcement of the prescribed behaviour by informal social sanctions.

We would like to stress that this definition of a social norm does not capture so-called internalised norms. There is no need for internalised norms to be enforced by social sanctions. In case of internalised norms sanctions are triggered by internal psychic processes. Unfortunately, there does not seem to exist much reliable knowledge about the workings of these internal psychic mechanisms. In this paper we are not concerned with the explanation of internalised norms which, of course, does not mean that they are not interesting or important. They are just not the object of our investigation. Notice that our definition of social norms has a behavioural component - a behav­ ioural regularity and its enforcement through sanctions - and a value component, that is, how one ought to behave. In this paper we are not so much concerned with the explanation for the value component. Instead we are mainly interested in the potential of social approval and disapproval as an effective sanctioning mechanism. SOCIAL NORMS AS A SOCIAL EXCHANGE 277

Our microfoundation for social norms is heavily based on the contribution of HOLLÄNDER (1990): As in HOLLÄNDER (1990) we assume that people value social approval positively and social disapproval negatively. In our view this is a rather plausible assumption which is, for example, shared by HARSANYI and SMITH. In addition, we assume that positive deviations from the norm trigger social approval while negative deviations elicit social disapproval. People are also assumed to know the prescribed behaviour and that deviations from the norm trigger social (dis)approval. As a conse­ quence they have an incentive to move their behaviour towards those actions that elicit social approval or avoid disapproval. They thus exchange or give up private resources and receive some social approval as a return. This exchange of private resources against social approval can be viewed as a social exchange. By a social exchange we mean an exchange in which a social and non-pecu­ niary reward medium is involved and in which obligations are not well specified. Moreover, those who (dis)approve of an action are not obliged in any sense to express (dis)approval. Nor are they capable of intentionally withholding or providing approval. Instead, their approval is a spontaneous emotional act that derives from the value component (the «ought») of the norm.1 In this sense the enforcement of the prescribed behaviour is based on informal, i.e. social, exchanges that contribute a sanctioning system. In the following we show that such social exchanges can give rise to stable behavioural regularities.

H. A SIMPLE MODEL OF SOCIAL EXCHANGE

Our definition of a social norm implicitly assumes that there is a conflict between the self-interested action and the action prescribed by the norm. If there were no such conflict there would be nothing to enforce. This conflict can be parsimoniously captured by an environment in which individual actions have external effects on the payoffs of other agents. Prototypical examples are common pool resources in which negative externalities

1. Our definition of a social exchange differs slightly from BLAUS definition. According to BLAU (1992, p. 93) the «basic and most crucial distinction (between economic and social exchanges) is that social exchange entails unspecified obligations.» We believe that the intentional manipulation of approval by the approver is a contradiction in itself and that there cannot exist an obligation for approval. Intentional manipulation of approval and obligatory approval negates the very notion of approval. To see what we mean: Imagine a teacher who demands some amount of money from his student in exchange for his expressed belief that the student has behaved according to a norm. Obviously the student would not place much value on this kind of approval. We do not deny that people sometimes try to express approval for strategic reasons. Such attempts, by the way, indicate that those who try to use approval strategically assume that "true" approval matters. What we dispute, however, is that approval which is merely expressed for strategic reasons is positively valued. In addition, we believe that humans are capable of distinguishing between "true", i.e. emotionally prompted, approval and "strategic", i.e. intentional approval. FRANK (1988) provides persuasive evidence that humans can distinguish between true and merely pretended or strategic emotions. 278 GÄCHTER/FEHR

arise and public goods situations in which positive externalities prevail. In the following we present a simplified and modified version of HOLLANDER'S model of approval-driven voluntary contributions to a public good. Consider a group of size n. A group member's preferences are expressed by

n M'' = y-g'" + a^ #> + JV, g"') (i)

y is f's endowment of private resources, gl is the amount of resources i gives up in favour of a group project with return a Eg7, a and n obey the inequality a < 7 < an. si is the aggregate amount of social (dis)approval the individual receives from other group members. sl depends on gl and on the average contribution of other members to the project g~l. If we neglect for a moment sl the incentives for / are such that he always chooses gl = 0. This follows from the fact that the private costs for Ag* = 1 equal 1 while the return is only a < 1. In the absence of approval incentives gl = 0 is thus a dominant strategy - nobody contributes to the group project. The inclusion of s* in individuals' utility function is thus an important assumption that will drive our results. The assump­ tion seems quite plausible. Why people have such preferences is an interesting question which is, however, beyond the scope of the present paper. In our view, it may well be that evolutionary forces gave rise to such preferences. With regard to s'(gl> g~l) we make the following assumptions (see also Figure 1):

1 sj > 0, sn <0,s2< 0, sJ2 > 0, sig = g-) = 0 (2)

According to (2) an increase in an individual's contribution causes an increase in social approval, i. e. Sj = dsl/dgl > 0. This effect may be due to the value component of the social norm which, in turn, may be caused be the mere existence of negative or positive externalities. In a situation with externalities individual f's action affects the aggregate welfare of the rest of the group. It seems thus natural that the others develop more positive feelings vis à vis i if he raises his contribution. The assumption that s is zero if g' = g^ is just a normalisation. The qualitative nature of our results do not change if it is dropped. Its advantage is, however, that it entails a natural interpretation of s in combination with the other assumptions2. Together with

2. Interestingly, in his Theory of Moral Sentiments ADAM SMITH (1976, p. 26) argues that the degree of social (dis)approval is related to the deviation from the modal action: "In cases of this kind, when we are determining the degree of blame or applause which seems due to any action, we very frequently make use of two different standards. The first is the idea of complete... perfection.... The second is the idea of that degree of proximity or distance from this complete perfection, which the actions of the greater part of men commonly arrive at. Whatever goes beyond this degree, how far soever it may be removed from absolute perfection, seems to deserve applause; and whatever falls short of it, to deserve blame." As in our model social (dis)approval is thus dependent on what others do. SOCIAL NORMS AS A SOCIAL EXCHANGE 279

1 l l sj > 0 and s2 = ds'/dg' < 0 it implies that g < g~ triggers disapproval (s* < 0) whereas g' > g~* elicits approval (^ > 0). s1} < 0 ensures that the second order condition is met. s12 > 0 has, however, a more important role to play. It means that if others increase their (average) contribution the marginal approval gain from a rise in gl increases. Approval incentives are thus stronger if others contribute more. In Figure 1 we depict two graphs of the approval function sl(g\ g~*). The graph with the lower level of sl corresponds to a i higher level of g"*. Due to sI2 > 0 this graph is also steeper at any level of g than the other graph. The steepness of the graph represents the strength of the approval incentive.

Figure 1: The social approval function

s i

^__ s\g\

i «— //'^^ s (g , g=g^ /\ . s' ft

A rational group member / will maximise his welfare by taking into account the pecuniary costs and returns as well as the approval effects of marginal contributions to the group project. The first order condition for a maximum of ul with respect to gl is given by

-l+a + sV>r') = 0 (3)

Each individual balances the marginal costs, -1, with the marginal pecuniary and non-pecuniary (approval) returns a + s'. A Nash equilibrium is obtained if (3) holds for all i = 1... n. To examine the nature of Nash equilibria it is useful to know how gl responds to g~l. Totally differentiating (3) yields

i i dg /dg- = -sI2/s1J>0. (4) 280 GÄCHTER/FEHR

1 Individual i contributes more if g" rises. This result is intuitive because s12 > 0 means that approval incentives are stronger in case of a larger g-1. In Figure 2 we illustrate the equilibrium for the case of n = 2 and y1 = y2. g1^) represents the utility maximising level of individual 1 for any choice of individual 2. g*(g*) has a similar interpretation with the role of the individuals reversed. The equilib­ rium is obtained at the intersection point of these best reply functions. As we can see, in equilibrium both individuals choose positive contributions. Since g2 > g1 individual 2 «earns» some positive amount of social approval while individual 2 «earns» some disapproval. The important point, however, is that both contribute because they expect and take into account the effects of their contributions on the amount of (dis)approval.

Figure 2: Social Approval Equilibrium

45°-line

Equilibrium

(g) y

Notice that if one individual is not at all motivated by social (dis)approval this individ­ ual's best reply function is given by gl - 0 for all levels of gf. Therefore, the only equilibrium is at gl = g?' = 0. More generally it can be shown that the less individual i is motivated by (dis)approval the lower will be the equilibrium contributions of both individuals. This follows from the fact that the lower the contribution of individual i the smaller is the approval incentive for individual j and, hence, the less individual j will contribute.3

3. This result also holds in the n-person case. SOCIAL NORMS AS A SOCIAL EXCHANGE 281

m. WHEN DO APPROVAL INCENTIVES MATTER? - AN EXPERIMENTAL TEST

We are aware of only one experimental paper that sheds some light on the above model of norm formation. FREY and BOHNET (1995) conducted a 4-person public goods experiment with two discrete choice opportunities: no contribution and a positive contribution. The experiment took place in a large classroom with subjects who attended the same course. In a control condition subjects played the game anonymously while in the treatment condition subjects could identify the other group members before they played the game. In the identification condition each group member stood up so that other group members could see with whom they play. Since subjects attended the same course there is a large probability that subjects will see each other many times during the rest of the course. Therefore, in the identification condition it is rather likely that approval incentives have been activated. The results indicate that under anonymity there are 12 percent cooperative choices (N = 43 groups) while in the identification condition there 4 are 23 percent cooperative choices (N = 16 groups). The FREY-BOHNET results thus suggest that in the public goods context approval incentives might be important. In the following experimental test of the above model we do not directly observe subjects' motivation. Instead we manipulate the possibility for approval motives to affect the behaviour of our experimental subjects. If subjects are indeed motivated by approval motives their contribution behaviour should be higher if there exists the possibility for social (dis)approval. In total we have implemented the following four treatment condi­ tions: 1. The anonymity treatment (A). In this condition experimental subjects cannot be the object of other group members' (dis)approval. Thus approval motives cannot affect behaviour. 2. A treatment that allows for social exchanges among strangers (S). In this condition experimental subjects can be the object of (dis)approval. Thus, if they are motivated by social (dis)approval and expect others to contribute a positive amount they will also choose a positive contribution. Only complete strangers, i.e. subjects who have never met before in their lives, participate in this condition. 3. A treatment that allows for social exchanges among subjects with a minimal social familiarity (S&F). Here subjects have the same opportunities for social exchanges as in condition 2 but, in addition, they are minimally socially familiar with each other. 4. A treatment that excludes social exchanges but implements the same minimal social familiarity as treatment 3 (F for familiarity). This condition is like treatment 1 but subjects have the same social familiarity as in treatment 3.

4. This difference is significant under an F-test if individual choices are used as observations. It is, however, unclear whether this difference remains significant if non-parametric tests are applied and if group outcomes are used as observations. Since in the identification condition individual choices in a given group are not independent group outcomes should be used in a test. 282 GÄCHTER/FEHR

In all treatment conditions subjects' pecuniary incentives were given by

n rc^y-g' + aX gi' (5)

The differences between treatment conditions S, S&F and F are motivated by two conjectures. First, it seems natural that the amount of social (dis)approval is positively related to the social proximity of subjects is. This was already conjectured by SMITH (1976, p. 23) who wrote: «We expect less sympathy from a common acquaintance than from a friend We expect still less sympathy from an assembly of strangers». Second, it is also likely that the motivating force of social (dis)approval is the lower the larger the social distance between subjects. Both conjectures generate the prediction that there will be more contributions in treatment S&F relative to S. However, since social familiarity alone may have an independent effect on contribution levels we also need the F-treatment as an additional control.

1. The Anonymity Treatment A

A crucial design feature of this treatment was anonymity. For each session we recruited 24 students from different fields5 to maximise the chances that they do not know each other. When we allocated subjects to groups of four each student in a group had to be from a different field. Students were informed that their group consists of people who study different subjects. The experiments took place in a large classroom in which subjects sat remote from each other. Subjects did not know with whom they formed a group. Neither before nor after the session they were informed about the identity of other group members. The experimental environment was as follows: in each group (of four) each individual had to make a decision regarding the allocation of 20 tokens to a private account and a group account. The payoff of each individual was equal to the amount she6 allocated to the private account plus 40 percent of the contributions of all group members to the group account. Therefore, the marginal return of one token in the private account was one, whereas the marginal return a of the group account was 0.4. Hence, irrespective of what other group members contributed to the group account, it was always in the interest of a selfish subject to free-ride completely. Yet, if everybody free rides the pay-off is 20 while if all four group members contribute all of their 20 tokens to the group account, each receives a payoff of 32.

5. Students of Economics were excluded. 6. For convenience, we always use the female gender. SOCIAL NORMS AS A SOCIAL EXCHANGE 283

This constituent game was replicated ten times. At the end of each period the experimenters collected the contributions to the group account, summed them up and informed each group member about the total amount on her group account. In each period subjects' monetary earnings were computed according to (5). In each treatment condition their total earnings are given by the sum of their period earnings. The ten-fold replication renders our control treatment similar to experiments de­ scribed in the literature (see DAVIS and HOLT [1993] or LED YARD [1995] for surveys). This has the advantage that the results of our control treatment can be easily compared to the stylised facts in similar experiments. Perhaps the most important stylised fact of these experiments is that contrary to the prediction of the standard model7 the average contribution is between 40 and 60 percent of the endowment in the first period and declines to a level between 10 and 20 percent in the final period. There thus seem to be very strong forces in these experiments that pull the contribution level towards the zero-contribution equilibrium. The existence of such strong regularities in the baseline (anonymity) treatment allows the study of two separate questions: (i) Under what conditions does the opportunity for social exchanges increase the contribution level? (ii) Under what conditions are social exchanges capable of breaking the decline in contri­ bution levels over time?

2. Social Exchange Among Strangers? - The S-Treatment

The basic stage game in the S-treatment was the same as in the A-treatment described in the previous subsection. Experimental sessions were conducted in a large classroom in exactly the same way as in the anonymity treatment. A group consisted again of four members from different fields and subjects knew that. At the beginning of the experiment subjects did not know with whom they formed a group. However, subjects were informed that at the end of the experiment (i.e. after period 10) the identity of each individual will be revealed to other group members. Moreover, they were told that each group member will be informed about their decisions in each of the ten periods and that they will have the opportunity to discuss their decisions with other group members. In the instructions this was formulated as follows: «At the beginning you don't know with whom you are in a group. At the end of the experiment, however, you will get to know your group members. Group members will meet and everybody will report and justify the decisions he or she has made during the experiment.» In each period subjects had to write down the reasons for their decision in a so-called report book. They were told that this report book will make it easier for them to answer questions of other group members at the end of the experiment. To make this psycho-

7. The standard model is a special case of our model in Section II. It assumes purely selfish behaviour, that is, s = 0. 284 GÄCHTER/FEHR

logically a part of the experimental task and to always remind them of the post-experi­ mental group discussion, we distributed a sheet called «report book» in which, for each period, they wrote down the reasons for their decision. While subjects knew that their identities and their decisions will become known to other group members after period ten their report book remained private information. At the end of the tenth period anonymity was lifted and group members met at a table. They were given their decision sheets such that every group member could see the decisions of the others in each period. Subjects were then told that they now have the opportunity to ask other members for the reasons of their choices and to discuss the group's decision during the experiment. Group discussions lasted between 10 and 15 minutes and were tape-recorded. The S-treatment adds to the A-treatment the report book, the revelation of subjects' identity and subjects' decisions and the group discussion after period 10. Notice that these features of the S-treatment do not ensure the occurrence of social exchanges. They only allow for social exchanges to occur. If subjects are not motivated by approval incentives or if they do not anticipate social (dis)approval in the group discussion they have no reason to behave differently compared to the A-treatment. However, if subjects value and anticipate (dis)approval contributions should be higher in the S-treatment.

3. Social Exchange Among Socially Familiar Group Members? - The SSLF-Treatment

The S&F-treatment differs from the S-treatment in the following way: Before the ten-period experiment group members' identities are revealed. Subjects shake hands and tell other group members what they study and what their hobbies are. After that each subject plays a game with each other subject in the group. In each instance of this sequence of bilateral games one subject, say subject A, has to guess the colour of a chip that is in the right hand of subjects B. Subjects had some fun with the guessing game and did not get paid for their activities in this game. The purpose of this pre-experimental interaction was to establish some minimal social familiarity among subjects. Notice that before this interaction subjects have been complete strangers. They have never seen other group members in their live before.8 In our view it is thus fair to say that our pre-experimental interaction ensured only a minimal social familiarity. After the pre-experimental game groups have been informed that they will participate in a further experiment and that the group composition will remain the same. The following ten-period public goods experiment was identical to the S-treatment. Notice that according to standard economic theory social familiarity per se should not affect behaviour in the ten-period game. From a social exchange perspective, however, it may well be the case that the pre-experimental game affects contributions in the public goods

8. This was verified in a post experimental questionnaire. SOCIAL NORMS AS A SOCIAL EXCHANGE 285

game. While subjects may not value or may not anticipate social (dis)approval from a complete stranger they may expect and may be motivated by the (dis)approval of a socially familiar person. There is thus a reason to expect higher contributions in the S&F-treatment compared to the S-treatment. From a psychological perspective our pre-experimental game may be less innocuous than it seems at firstglance . Social familiarity may generate some group identity and this may raise contribution levels even in the absence of social exchange opportunities. To separate the effects that arise from social familiarity alone from the effects that arise from the combination of social familiarity with social exchange opportunities we implemented an additional treatment condition. This condition removes the social exchange part from the S&F-treatment, that is, there was no report book, no information about individual contributions and no group discussion after period ten. We tried to rule out any post-ex­ perimental contact among subjects. For that purpose each subject was paid privately outside the classroom9 and had to leave the site of the experiment immediately upon receiving the payment. When we asked subjects one year after the experiment about their post-experimental contacts with other group members 85 percent said that they have never met other group members after the experiment.

IV. RESULTS

In total we conducted 11 experimental sessions. Three sessions were held at the University of Linz in spring and fall of 1994 and seven sessions were held at the University of Zurich in November 1994 and January/February 1995. In each session, six independent groups with four individuals simultaneously participated in the experi­ ments10. In the A-treatment there were 11 groups while in each of the other three treatment conditions we had 18 groups. Subjects received 70 AS (about 7 $) for showing up on time plus their earnings in the experiment. In the Swiss sessions, earnings were adjusted accordingly. In both treatments, payoffs were denoted in «points» during the experiment. At the end of the session the gains measured in points were summed up and exchanged to Austrian Schillings (AS) and Swiss Francs, resp., with an exchange rate of 40 Groschen (10 Rappen) for 1 point. This exchange rate was common knowledge. In both treatments, the minimal gain was 200 points, that is 80 AS. The maximum possible gain with cooperative behaviour was 320 points or 128 AS (about 12 $). In the A-treatment subjects earned on average 245 points, in the S-treatment 250 points, in the S&F-treatment 290 points and in the F-treatment 260 points. Since a session lasted about two hours these earnings are sufficient to cover the opportunity costs of time for our subjects.

9. This was also the case in the other treatment conditions. 10. The exception is Session 1. Due to show-up problems, we only had 5 groups with four subjects each. 286 GÄCHTER/FEHR

After reading the instructions subjects had to solve several numerical examples to teach them how to compute their earnings and how earnings vary with their decisions. We did not start the experiment before all subjects had correctly solved all examples. Our main result is that neither the S- nor the F-treatment generate a contribution behaviour that differs significantly from the A-treatment. If however the opportunity for social exchanges is combined with some minimal social familiarity there is a significant increase in contribution levels. In the following we present the evidence for this claim step by step. In Figure 3 we show the average contribution (as a percentage of the total endowment) of each group over all ten periods for each treatment condition. In all treatments voluntary contributions are far above the Nash-equilibrium prediction of zero contributions. Despite strong free-riding incentives some groups were able to establish rather high levels of cooperation whereas others had a clear free-rider problem. In all conditions the most cooperative groups contributed 80 percent or more while the least cooperative groups invested between 20 and 40 percent. The differences between the treatments become transparent if, for example, we look at those groups that contributed more than 60 percent (where cooperation is dominant) or less than 40 percent (where free-riding is dominant). In the A-treatment there are three out of eleven groups (27 %) who contribute more than 60 while 3 groups contribute less than 40 percent. In the S-treatment the fraction of groups with more than 60 percent contributions is 5/18 (28 %); the fraction with less than 40 percent is 5/18, too. In the F-treatment the fraction of groups above 60 percent is 6/18 (33%) while the fraction below 40 percent is 5/18. This comparison already makes it quite clear that the differences across the A-, the S- and the F-treatment are rather small. The picture changes significantly, however, if we look at the S&F-treat­ ment. Here 12 out of 18 groups (67 %) achieve contribution levels above 60 percent. In addition there are no groups who contributed less than 40 percent. Thus, the differences between the S&F-treatment and the other conditions already becomes visible at this level of presentation. If we conduct pairwise MANN-WHlTNEY-tests with the above group averages as observations the null hypothesis of equal group averages between A-, S- and F-treat- ments can never be rejected. Yet, in any pairwise comparison with the S&F-treatment the null hypothesis can be rejected. This result is also confirmed if the treatment conditions are compared simultaneously by a KRUSKAL-WALLis-test. A simultaneous comparison of the A-, S- and F-treatment reveals no significant differences while if all four conditions are compared simultaneously significant differences emerge. SOCIAL NORMS AS A SOCIAL EXCHANGE 287

Figure 3: Group averages over all periods

g 0.8

Ö 0.4 * 0.2 I A-treatment I 111 I^ I ^ 123456789 10 11 groups 1 0.8 I 0.6 htiT £ 0.4 nun cd iniiiii.. I S-treatment 0.2 0 IIIIIIIIIIRIIIIII 1 3 5 7 9 11 13 15 17 groups

1 0.8 I 0.6 g 0.4 * 0.2 I F-treatment 0 lMl"l"l"l"l"l"l"l"l"l"l"l"Min l 1 3 5 7 9 11 13 15 17 groups

1 * 0.8 g> 0.6 ö 0.4 I S&F-treatment * 0.2 0 1 3 5 7 9 11 13 15 17

groups 288 GÄCHTER/FEHR

Figure 3 and the above tests use the group averages over all ten periods as observations. The same results are, however, obtained if we use only the group averages in period 1 or the group averages in period 10 as observations. The S&F treatment causes thus already in period 1 a significant increase in contribution levels. Moreover, this increase is maintained until period 10. This result can also be seen in Figure 4 in which we present the evolution of the average contributions over time for each treatment condition. Figure 4 shows that the dynamic pattern of behaviour in treatment A basically replicates the pattern observed in similar voluntary contributions experiments (DAVIS and HOLT [1993] or LEDYARD [1995]). Surprisingly the same dynamic pattern of average contri­ butions is exhibited by the S- and F-treatment. Thus the similarities between the A-, S- and F- treatment do not only show up at the level of group averages. The treatments generate also rather similar dynamic patterns. At the beginning cooperation levels are roughly between 60 and 70 percent. Until period 9 contributions decline to approximately 40 percent of the endowment and there is a sharp end-game effect in period 10. Interestingly, a similar dynamic pattern - although at a considerably higher level - is exhibited by the S&F-treatment. In our view these data suggest that similar dynamic forces are operative in all four treatment conditions.

Figure 4: Evolution of average contribution over time

-»- S&F-treatment -•- S-treatment —•— F-treatment -o- A-treatment

A final look at our data is presented in Figure 5. The figure shows the relative frequency of contribution levels in each treatment condition. Interestingly, in all treatment condi­ tions gl = 20 is the most frequent choice while gl = 0 comes second. It is easy to see that the relative frequency of gl = 20 increases if we move from the A- to the S- and then to the F-treatment. In the S&F-treatment the relative frequency of gl = 20 is highest. Figure 5 indicates that the S- and the F-treatment induce a slight increase in the relative frequency of fully cooperative choices. Yet, since there is still a considerable number of zero-choices, average contributions in these conditions are not significantly different from those of the A-treatment. This is in contrast to the S&F-treatment in which we have a rather low frequency of zero-choices. SOCIAL NORMS AS A SOCIAL EXCHANGE 289

Figure 5: Distribution of contributions

0.5 0.4 a 0.3 l 0.2 I A-treatment 0.1

MH—i"i"i"i"i"i"i"Fi"i"i"i"i"i"ri—i'i"i"l — !•!•!• !• I — I" |B|W|B|B|B|B I—IBIM I- |1 I —i il 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 0.5

0.4

f 0.3 2 I °* I S-treatment 0.1

0 B|M|i|B|BiM|B|B|B|l"l"l*l"l"l"l"l*lMB l"lIIJ.HliJl*l*l l|B|w|l|MmiwMl*l-|wl"|-ml 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1617 18 19 20

0.5

0.4

| 0.3 02 I I F-treatment 0.1

B M M 0 •| |Bl"l |F|"l*l l"l"l"|B|«|-|l|W|H|W| y 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 1920

0.5

0.4

f 0.3 e

| 0.2 I S&F-treatment 0.1 "l-i"l"i"i"i-i-i"l"i"i—I"I"I"|I|"I"|M|" 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 1920 290 GÄCHTER/FEHR

V. SUMMARY AND CONCLUSIONS

The social sciences have long been plagued by the problem of explaining the existence of social norms. In sociology, in particular, there is a tradition to take social norms as a primitive concept that is used to explain behaviour. However, as has been forcefully argued by e.g. COLEMAN (1990) or OPP (1983), social norms are an aggregate phenome­ non that needs to be explained. In this paper we have presented such a microfoundation of social norms which is heavily based on HOLLÄNDER (1990). The basic ingredients of our model are closely related to the social exchange approach as developed by HOMANS (1961), BLAU (1964), EMERSON (1972), COOK (1982) and others. The main driving force behind exchange-driven norms is the approval (disapproval) elicited by the prescribed (proscribed) action. In the empirical part of our paper we implemented the opportunity for an exchange between social approval and voluntary contributions in a public goods game. If our preference assumptions and the assumption about the elicitation of social (dis)approval via relative contribution levels are correct and if subjects anticipate social (dis)approval in response to their relative contribution levels one should observe that the opportunity of social exchanges gives rise to higher contribution levels. Moreover, if the amount of (dis)approval and the motivational force of (dis)approval is positively related to the social proximity of subjects an increase in subjects' social familiarity should enhance the effectiveness of approval incentives. Our experimental results indicate that the opportunity for social exchanges does not affect behaviour among complete strangers. However, only a minimal social familiarity of subjects in combination with the opportunity for social exchanges has significant behavioural effects. When subjects are minimally familiar with each other the opportu­ nity for social exchanges gives rise to significantly higher contribution levels. Moreover, a minimal social familiarity alone does not give rise to an increase in contribution levels. These results lend support to the social exchange explanation of social norms put forward in this paper. However, we do not want to hide some remaining weaknesses in our empirical approach. In our view the main weakness is that we do not yet provide evidence for the existence of the emotional responses assumed in the theoretical part of the paper. A preliminary analysis of the tape recorded group discussions at the end of the experiment indicates, however, that quite frequently their was a lot of heat in these discussions. Some subjects used rather strong verbal expressions for those who took a free-ride. Sometimes so strong that custom forbids us to tell the reader these terms.

REFERENCES

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BOOTH, A.L. (1985), «The Free Rider Problem and an Social Custom Model of Trade Union Membership», Quarterly Journal of Economics 100, pp. 253-261. COLEMAN, J. (1990), Foundations of Social Theory, Cambridge, MA: Harvard Univer­ sity Press. CORNEO, G. (1995), Social Custom, Management Opposition, and Trade Union Mem­ bership, European Economic Review 39(2), pp. 275-292. COOK, K. (1982), «Network Structure from an Exchange Perspective», in: P.V. Marsden and N. Lin (eds.), Social Structure and Network Analysis, Beverly Hills: Sage Publications. DAVIS, D., and C. HOLT (1993), Experimental Economics. Princeton University Press. ELSTER, J. (1989), The Cement of Society - A Study of Social Order, Cambridge- Cambridge University Press. EMERSON, R. (1972), «Exchange Theory», in: J. Berger, M. Zelditch Jr. and B. Anderson (eds.), Sociological Theories in Progress, Vol. 2, Boston: Houghton Mifflin. FEHR, E., S. GÄCHTER, and G. KIRCHSTEIGER (1996), «Reciprocity as a Contract Enforcement Device», forthcoming in: Econometrica. FEHR, E., and S. GÄCHTER (1996), «How Effective are Trust- and Reciprocity-Based Incentives?» forthcoming in: A. Ben-Ner and L. Putterman (eds.): Economics, Values and Organizations, Cambridge, England: Cambridge University Press. FRANK, R. (1988), Passions within Reason - The Strategic Role of Emotions; New York-London: W. W. Norton & Company. FREY, B.S. and I. BOHNET (1995), «Institutions affect Fairness - Experimental Investi­ gations», Journal of Institutional and Theoretical Economics 151, pp. 286-303. GÄCHTER, S., E. FEHR, and C. KMENT (1996), «Does Social Exchange increase Volun­ tary Cooperation?», Kyklos, 49(4), pp. 541-554. HOLLÄNDER, H. (1990), A Social Exchange Approach to Voluntary Cooperation, 80, pp. 1157-1167. HOMANS, G.C. (1961), Social Behavior: Its Elementary Forms; New York: Harcourt, Brace & World. LEDYARD, J. (1995), Public Goods: A Survey of Experimental Research, in: Handbook of Experimental Economics, ed. by J. KAGEL and A. ROTH, Princeton University Press. KANDEL, E., and E. LAZEAR (1992), «Peer Pressure and Partnerships», Journal of Political Economy, Vol. 100, pp. 801-817. NAYLOR, R. (1989), «Strikes, Free Riders, and Social Customs», Quarterly Journal of Economics, Vol. 104, pp. 771-785. OPP, K.D. (1983), Die Entstehung Sozialer Normen, Tübingen: J. C. B. Mohr (Paul Siebeck). OPP, K.D. (1996), «Moral Incentives and Collective Political Action», Discussion Paper, University of Leipzig. OSTROM, E. (1990), Governing the Commons - The Evolution of Institutions for Collective Action, Cambridge: Cambridge University Press. 292 GÄCHTER/FEHR

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SUMMARY

Social Norms are a pervasive phenomenon in social and economic life. They have important economic consequences and constitute powerful social constraints on individ­ ual behaviour beyond the legal constraints and the market constraints usually considered by economists. This paper presents a simple theory of social norms that is based on the social exchange approach as developed by e. g. HOMANS, BLAU and more recently by HOLLÄNDER. The sanctioning of deviations from the norm by social (dis)approval is at the heart of this approach. The paper also provides an experimental test of the theory. The empirical results indicate that social exchanges are not capable of generating behavioural effects among complete strangers. Yet, with some minimal social familiarity among subjects the opportunity for social exchanges gives rise to a significant increase in voluntary cooperation and, thus, norm governed behaviour.

ZUSAMMENFASSUNG

Soziale Normen sind eine weitverbreitete Erscheinung. Sie haben wichtige wirt­ schaftliche Konsequenzen und konstituieren - zusätzlich zu den typischerweise von Oekonomen betrachteten Handlungsbeschränkungen - machtvolle Schranken für das individuelle Handeln. In dieser Arbeit wird eine einfache Theorie sozialer Normen vorgestellt, die auf dem von HOMANS, BLAU, HOLLÄNDER u. a. entwickelten Ansatz des sozialen Austauschs beruht. Der zentrale Kern dieses Ansatzes besteht in der Sank­ tionierung von Normabweichungen durch soziale Zustimmung oder soziale Ablehnung. Die Arbeit stellt auch die Resultate eines experimentellen Tests dieser Theorie vor. Die empirischen Resultate zeigen, dass sozialer Austausch unter sich völlig fremden Per­ sonen keine Verhaltenswirkungen zeitigt. Wenn jedoch eine minimale soziale Ver­ trautheit zwischen den Personen existiert, erzeugt die Möglichkeit soziale Austauschprozesse vorzunehmen einen signifikanten Anstieg freiwilliger Kooperation, d.h. von normengeleitetem Verhalten.