Altruism and Social Norms Lecture Notes

Altruism and Social Norms in Economics

Overview of Key Concepts

• Public Goods

  • Definition: Goods that are non-excludable and non-rival; consumption by one does not reduce availability to others.

• Self-interest vs Altruism

  • Indifference Curves: Used to illustrate the trade-offs between self-interest and altruistic preferences.
  • Altruism can change outcomes significantly in economic interactions.

• Repeated Games & Social Norms

  • Importance of the ability to enforce social norms to change outcomes in repeated interactions.
  • Relates to trust and cooperation among individuals.

The Ultimatum Game

• Game Structure

  • Two players: One proposes a split of a prize; the other can accept or reject it.
  • If rejected, both receive nothing—this creates a dynamic of fairness versus self-interest.

• Behavioural Outcomes

  • Most responders will reject offers perceived as unfair (e.g., 80-20 split).
  • Purely self-interested responders would accept any offer, but real behaviour shows rejection of low offers, indicating fairness norms.
  • In studies, most rejections occur on offers below 50%.

• Expected Utility Theory

  • Calculating expected pay-offs involves:
    ext{Expected Pay-off} = p imes ext{Pay-off}
  • Examples show different proposals like 50% split (most accepted) and lower offers encountering rejection due to fairness norms.

Competition in the Ultimatum Game

• Introducing Competition

  • If a second responder is introduced, acceptance and rejection behaviours shift.
  • Competition decreases the likelihood of rejecting low offers and alters proposers’ strategies.

• Model of Worker Strikes

  • Analogy to wages: Employers must consider worker responses to wage offers; low offers risk a strike.
  • The ultimatum game can model this interaction clearly.

Coordination Games

• Definition and Dynamics

  • Players must coordinate their actions without communication, leading to multiple Nash equilibria.
  • Example: Choosing between two goods (rice vs. cassava) where both players have best responses that depend on opponent's choice.

• Nash Equilibria

  • There are two possible equilibria even with conflicting preferences, highlighting the need for communication to achieve optimal outcomes.
  • Examples in coding language preferences illustrate conflicts even when cooperation maximizes total benefits.

Application to Climate Change

• Prisoner’s Dilemma Model

  • Models interactions between countries concerning climate actions, revealing mutual benefits from cooperation.
  • Examples show that self-interested outcomes (BAU) may lead to suboptimal environmental conditions despite higher pay-offs available from cooperation.

• Coordination Game Framework

  • Possible strategies: Country A and Country B can choose to restrict or continue BAU, with varying pay-offs based on cooperation or conflict.
  • Each model yields different incentives and equilibria, complicating climate negotiations.