In-Depth Notes on Altruism, Repeated Games & Social Norms

Social Dilemmas

• Examines situations where individual self-interest conflicts with collective interest, highlighting the issues of externalities and public goods.
• Population growth increases the urgency of these dilemmas.

Game Theory Terminology

• Important components include players, strategies, payoffs, and outcomes.
• Dominant strategies lead to either optimal or sub-optimal results for participants.

Examples of Game Strategies

• Good Dominant Strategy: A choice that always yields a better outcome regardless of what others do.
• Bad Dominant Strategy: A choice that can lead to worse outcomes for all when following self-interest.

Pareto Criterion

• Offers a method to evaluate allocations based on their efficiency — an allocation is Pareto optimal if no further improvements can be made without making someone worse off.
• Limited in ranking alternative allocations.

Public Goods Definition

• Non-excludable: Individuals cannot be effectively excluded from use.
• Non-rivalrous: One person's use does not reduce availability for others.
• Examples:
  • Pure public good: Large fireworks display.
  • Pure private good: A loaf of bread.

Self-interest vs. Altruism in Public Goods

• In a public good scenario, individuals may choose to free ride on others' contributions.
• Results in the dominant strategy of no contribution, which is a sub-optimal outcome:
  • Individuals gather benefits from what others pay without contributing themselves.

Social Preferences and Altruism

• People often demonstrate preferences indicating concern for others, not just self-interest.
• One prominent social preference is Altruism: Individuals obtain utility when benefiting others.
• Other preferences include:
  • Reciprocity
  • Inequality aversion
  • Fairness
• Negative social preferences may include feelings like envy.

Cooperation in Experiments

• Evidence from lab experiments indicates that individuals can cooperate beyond self-interested models:
  • Suggests the necessity to refine our economic models to integrate social preferences.

Preferences in Decision Making

• Altruistic Preferences can manifest in various decision-making scenarios, altering outcomes.
• Varying degrees of altruism affect utility and optimal choices in interactions.

Pest Control Game Example

• Illustrates how altruistic versus self-interested preferences lead to different responses:
  • Self-interest leads to choices that may damage collective outcomes.
  • Altruistic choices lead to better outcomes for the combined preferences of the group.

Repeated Interactions

• Real-world decisions often involve repeated interactions that can lead to different strategies:
  • Reputation can influence behavior in larger cities versus small towns, affecting cooperation levels.

Public Good Experiment Insights

• In a public good game:
  • Players who contributed received benefits, but many chose not to contribute due to incentives to free ride.
• Feedback on free-riders impacted contributions negatively over time.

Social Norms in Economics

• Social norms significantly influence human behavior:
  • Norms around reciprocity guide interactions and may be absent in simpler economic models.
• The role of punishment for non-reciprocity can encourage higher contribution levels.

The Creche Field Experiment

• Illustrates how monetary fines can crowd out social norms:
  • When fines were introduced for lateness, rates increased, indicating the social norm's value was undermined by monetary penalties.

Summary of Key Points

1. A public good must be non-excludable and non-rival.
2. Altruism and self-interest can be depicted using indifference curves.
3. Games can incorporate altruistic preferences yielding different outcomes.
4. Repeated interactions are crucial for understanding social norms in economic contexts.