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
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Daniel John Zizzo