Endogenous Social Preferences
27 Pages Posted: 15 Jan 2002
Date Written: October 2001
A long-standing discussion in economics has developed around the issue of whether institutions (specifically markets) affect peoples' social preferences. One theory posits that markets force people to interact repeatedly, and in so doing reduce anonymity, curtail opportunistic behavior, and make agents more socially minded. The opposing view contends that markets are alienating because they make interactions more (not less) anonymous and competition erodes peoples' preferences to engage in selfless, group-beneficial acts. This paper presents the results of an experiment designed to quantify the extent to which different aspects of markets affect peoples' social preferences by varying the level of anonymity, the incentive to reciprocate friendly acts, and the degree of competition. We find that reducing anonymity does make people nicer, but mostly because reducing anonymity reduces peoples' ability to engage in opportunistic acts. More importantly, we find that market competition erodes social preferences through two mechanisms. First, market competition encourages opportunistic behavior which creates a less friendly atmosphere and second, controlling for the first effect, the market institution itself decreases the other-regardingness of our participants.
Keywords: endogenous preferences, experiment, ultimatum game, best shot game, market competition
JEL Classification: C72, C91, C92, D64
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