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BE
Two traditional assumptions about preferences
Selfish : their utility comes from their own payoff. unless there’s a need for reputation building, people will not trust anyone and have no concern of or fairness.
Exogenous : preferences are hard-wired traits that do not change during the lifetime and can’t be impacted by any individual experiences or environment.
Formula of social preferences
(below) when X1 is behind
(above) when X1 is ahead
which soc. preference?
which soc. preference?
which soc. preference?
which soc. preference?
Explain trust game (and its connection to reciprocity!)
trustor and trustee
trustor is endowed with budget X and can send some of the money Y < X to the trustee
trustee have to send it back by a factor of < 1. this can be thought as returns. returns * Y = Z
trustee also have the willpower to not send anything (stealing)
ultimate payoff :
to the trustor X-Y+Z
to the trustee is returns * Y - Z
In an ideal world (subgame perfect equilibrium + self-regarding), the trustee will not transfer anything back, thus preventing the trustor to send anything in the first place
However, this is not true as in reality, 30-40% of the money is still sent back
trustor have reasons to send the money which are :
beliefs in trustworthiness
social preferences they apply towards trustee (altruism, etc)
Explain prisoner’s dilemma (and its connection to reciprocity!)
If both players are selfish :
defect is a dominant strategy between players as they will generate the most profitable prison sentence
defect here means that they betray the other player each time(not cooperating with e/o) —> nash equlibrium
if the games are repeated between the fixed pairs (in finite times), a lot of subject will be somewhat cooperative (sometimes only once)
Explain this concept
As the wage decreases, the amount of labor required by the employer will increase as the workers can be paid cheaper.
If this downward (demand for labor) line decreases —> will create something called downward nominal rigidity as the line will shift more to the left but stays on the same wage rate. When this happens, it means that the amount of labor need has decreased. Thus, unemployment happens. At any given wage, the employers are not able to hire more workers.
As the wage increases, more workers are willing to supply the labor thus the pictured increase.
When the intention of people want to work exceed the demand for labor owned by employer, it will create labor surplus = unemployment. The further the lines are from each other, the longer (worse) the unemployment line is.
Connection between downward nominal rigidity and unemployment
When labor demand decreases (e.g., during a recession), employers may want to lower wages to hire more workers. However, due to downward wage rigidity, wages remain high.
At these high wages, employers cannot afford to hire as many workers, leading to a reduction in the amount of labor employed.
Meanwhile, the labor supply (workers willing to work at the high wage) exceeds the labor demand, resulting in unemployment.
There are several experiments when it comes to reciprocity on the labor market, explain briefly! (Workers in a company)
With gift (surprise in the beginning) people will only work enthusiastically in the beginning and as the time progresses, the number will fall on the average again. Those who doesn’t receive any gift work averagely
Negative reciprocity — people will work less when they are haunted by surprise cut in wage (they are not treated well, so they do the exact same thing to the company)
Non monetary gifts are more appreciated if though the value is not that much (and they are told that). Worker’s effort will increase in return. However when given the choice between money and bottle, they will still choose money. In return, they will work more (although decreases until the end of shift)
Explain inequality in the workplace and how it may reduce worker’s effort!
Workers are assigned to two groups : (i) with everyone receiving the same wage and another (ii) with different ones
with different wages, workers reduce their output by 12% and come to work 13% less often. those who receive higher wages have no effects/shows no change —> is not economically justified as this tactic underestimate/worsen the quality of the weakest workers without boosting the strongest. (kembali ke poin tadi, wage cut reduces effort)
When there is a strong justification for pay differences, the negative effect on the lowest pay workers disappear.
Reciprocity in charitable giving, explain!
Setting are divided into :
Those who donate will receive such (based on the amount of their donation) :
no gift'
small gift
large gift
Differences of social preferences will result in :
Selfish = not donating at all
Altruism = unconditional donation, doesnt matter which condition of gift
Reciprocity = they will go for the larger gift first
Findings prove that sums of donations from those who want the largest gift will be bigger but for the NGO to effectively compound money is by giving small gifts
