Preferences, Interdependent

BIBLIOGRAPHY

Interdependent preferences models rely on the basic intuition that economic agents are not always purely self-interested. This intuition may sound uncontroversial to noneconomists, but it is surprisingly so among the many economists who like parsimony and believe self-interest is a good approximation for most, or all, economic behavior.

Agent A has interdependent preferences whenever A ’s utility function depends on those of other agents in the reference group. Consider two agents, A and B. A ’s generic utility function with interdependent preferences is U = u (x ) + s (x, y, λ) v (x, y, λ), where u is the material utility component of the utility function and is a positive function of A ’s material consumption x ; v is the interdependent utility component of the utility function and can be a function of x, is always a function of B ’s material consumption y, and can be a function of a vector of additional parameters λ; and s is the interdependent component weight in the utility function, is bounded between –1 and 1, and can be a function of x, y, and λ. The utility function reduces to the self-interest case if s = 0.

The generic utility function encompasses most interdependent preferences models (nonadditive versions are also possible):

Pure altruism where s > 0 and is a constant, and v is only a positive function of y (Collard 1975).

Pure envy where s < 0 and is a constant and v is a positive function of y and a nonpositive function of x (Clark and Oswald 1998).

Distributional models that are a function of the distribution of incomes between the players (v is a function only of x and y, with the weight s ) depending on how they relate to one another (Fehr and Schmidt 1999; Bolton and Ockenfels 2000).

More complex psychological characterizations based on intentionality, as captured by the dependence on λ (Levine 1998; Falk and Fischbacher 2001; Charness and Rabin 2002).

λ could also incorporate other psychological considerations, such as group identity (Akerlof and Kranton 2000; Darity et al. 2006). There is strong empirical evidence for interdependent preferences (for reviews, see Camerer, 2003; Sobel 2005; Zizzo 2000), with distributional models outperforming pure altruism or envy (Zizzo 2003b, 2004) and intentions mattering (Falk et al. 2003).

Four limitations of interdependent preferences are their cardinality, heterogeneity, endogeneity, and context-sensitivity. Cardinality means that an individual’s generic utility function requires strong interpersonal comparability of utility. Heterogeneity reflects the intuition that different people have different preferences, and the holy grail of capturing the empirical distributions of preferences is still at its early stages (see Burlando and Guala 2005 for an example). Endogeneity reflects the fact that environmental factors shape one’s interdependent preferences, and this has policy implications (Zizzo 2003a). Most seriously, interdependent preferences are sensitive to the context of the decision problem, that is, to the way that the decision problem is perceived, with a large number of factors coming in and possibly interacting with one another (e.g., deservingness, social distance, communication, and so on) in ways that are poorly understood (Harrison and Johnson 2004; Konow 2000; Zizzo 2000, 2004). Adding dummy variables to ever more complex utility functions is hardly a solution; understanding the cognitive mechanisms underlying how agents perceive decision problems would be, but regretfully it is not a step that most economists are willing to take.

SEE ALSO Endogenous Preferences; Evolutionary Games; Lexicographic Preferences; Preferences; Reciprocity

BIBLIOGRAPHY

Akerlof, George, and Rachel Kranton. 2000. Economics and Identity. Quarterly Journal of Economics 115 (3): 715–753.

Bolton, Gary E., and Axel Ockenfels. 2000. ERC: A Theory of Equity, Reciprocity, and Competition. American Economic Review 90 (1): 166–193.

Burlando, Roberto, and Francesco Guala. 2005. Heterogeneous Agents in Public Goods Experiments. Experimental Economics 8 (1): 35–54.

Camerer, Colin, 2003. Behavioral Game Theory: Experiments in Strategic Interaction. Princeton, NJ: Princeton University Press.

Charness, Gary, and Matthew Rabin. 2002. Understanding Social Preferences with Simple Tests. Quarterly Journal of Economics 117 (3): 817–869.

Clark, Andrew E., and Andrew J. Oswald. 1998. Comparison-Concave Utility and Following Behaviour in Social and Economic Settings. Journal of Public Economics 70 (1): 133–155.

Collard, David. 1975. Edgeworth’s Propositions on Altruism. Economic Journal 85: 355–360.

Cox, James C., Daniel Friedman, and Steven Gjerstad. 2004. A Tractable Model of Reciprocity and Fairness. http://www.econlab.arizona.edu/~gjerstad/papers/CFG_2005_TMRF.pdf.

Darity, William A., Patrick L. Mason, and James B. Stewart. 2006. The Economics of Identity: The Origin and Persistence of Racial Identity Norms. Journal of Economic Behavior and Organization 60 (3): 283–305.

Falk, Armin, and Urs Fischbacher. 2001. Distributional Consequences and Intentions in a Model of Reciprocity. Annales d’Economie et de Statistique 63–64: 111–129.

Falk, Armin, Ernst Fehr, and Urs Fischbacher. 2003. On the Nature of Fair Behavior. Economic Inquiry 41 (1): 20–26.

Fehr, Ernst, and Klaus M. Schmidt. 1999. A Theory of Fairness, Competition, and Cooperation. Quarterly Journal of Economics 114 (3): 817–868.

Harrison, Glenn W., and Laurie T. Johnson. 2004. Identifying Altruism in the Laboratory. http://www.altruists.org/f256.

Konow, James. 2000. Fair Shares: Accountability and Cognitive Dissonance in Allocation Decisions. American Economic Review 90 (4): 1072–1091.

Levine, David K. 1998. Modeling Altruism and Spitefulness in Experiment. Review of Economic Dynamics 1 (3): 593–622.

Sobel, Joel. 2005. Interdependent Preferences and Reciprocity. Journal of Economic Literature 43 (2): 392–436.

Zizzo, Daniel J. 2000. Relativity-Sensitive Behaviour in Economics. Ph.D. diss., University of Oxford, Oxford, U.K.

Zizzo, Daniel J. 2003a. Empirical Evidence on Interdependent Preferences: Nature or Nurture? Cambridge Journal of Economics 27 (6): 867–880.

Zizzo, Daniel J. 2003b. Money Burning and Rank Egalitarianism with Random Dictators. Economics Letters 81 (2): 263–266.

Zizzo, Daniel J. 2004. Inequality and Procedural Fairness in a Money Burning and Stealing Experiment. In Research on Economic Inequality, Vol. 11, ed. F. A. Cowell, 214–247. New York: Elsevier.

Daniel John Zizzo