The Importance of Foregone Options: Generalizing Social Comparisons in Sequential-Move Games
34 Pages Posted: 2 May 2007 Last revised: 6 May 2008
Date Written: May 6, 2008
Abstract
Recent experimental evidence supports the influence of a player's unchosen alternatives on other agent's actions. This paper examines a tractable theoretical model of reference-dependent preferences in which individuals compare other players' chosen action with respect to their unchosen alternatives. We analyze the equilibrium prediction in complete information sequential-move games, and compare it with that of standard games where players are not concerned about unchosen alternatives. We show that, without relying on interpersonal payoff comparisons (i.e., with strictly individualistic preferences), our model predicts higher cooperation among the players than standard game-theoretic models. In addition, our framework embodies different models from the literature on social status acquisition and intentions-based reciprocity as special cases. Finally, we confirm our results in three economic applications: the ultimatum bargaining game, the labor market gift exchange game, and the sequential public good game.
Keywords: Unchosen alternatives, Sequential-move games, Reference-dependent preferences, Kindness, Reciprocity
JEL Classification: C72, C78, C91
Suggested Citation: Suggested Citation
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