The House Money Effect and Negative Reciprocity

35 Pages Posted: 7 Feb 2014 Last revised: 18 Dec 2014

See all articles by Katarína Danková

Katarína Danková

University of East Anglia (UEA)

Maroš Servátka

Macquarie Graduate School of Management - MGSM Experimental Economics Laboratory

Date Written: December 5, 2014

Abstract

In the vast majority of laboratory experiments documenting the existence of reciprocity subjects are endowed with windfall funds. In many environments with salient fairness considerations such endowments are known to inflate subjects’ other-regarding behavior, thereby creating a so-called “house money effect.” This suggests that laboratory experiments might also overestimate reciprocal behavior. In this study we identify two reasons why the source of endowment might matter for negative reciprocity: (1) Using earned – as opposed to windfall money – might increase the costs of negative reciprocity due to this money being in a different mental account and therefore lead to less retaliation. (2) Appropriating some of the decision-maker’s endowment consisting of earned money might be considered a stronger violation of property rights and lead to more retaliation. While we find experimental support for the latter conjecture, we also observe that subjects actually retaliate more with their earned money than with windfall money as long as at least a part of their endowment is earned. However, conditional of earning a part of their endowment, subjects do not seem to distinguish between situations when they retaliate using earned money versus using windfall, suggesting that their main motivation is the violation of property rights established by performing a real-effort task. Our results thus point out that endowing subjects with windfall funds, absent of clearly established property rights, deflates their negatively reciprocal responses.

Keywords: Real Effort, Experiment, House money, Reciprocity, Taking Game

JEL Classification: C71, C91, D03, D64

Suggested Citation

Danková, Katarína and Servátka, Maroš, The House Money Effect and Negative Reciprocity (December 5, 2014). Available at SSRN: https://ssrn.com/abstract=2392210 or http://dx.doi.org/10.2139/ssrn.2392210

Katarína Danková

University of East Anglia (UEA) ( email )

Norwich Research Park
Norwich, Norfolk NR4 7TJ
United Kingdom

Maroš Servátka (Contact Author)

Macquarie Graduate School of Management - MGSM Experimental Economics Laboratory ( email )

Sydney
Australia

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