1995 institutions affect fairness_experimental investigations

7/28/2019 1995 Institutions Affect Fairness_Experimental Investigations

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Institutions Affect Fairness: Experimental InvestigationsAuthor(s): Bruno S. Frey and Iris BohnetReviewed work(s):Source: Journal of Institutional and Theoretical Economics (JITE) / Zeitschrift für die gesamte Staatswissenschaft, Vol. 151, No. 2 (Jun. 1995), pp. 286-303

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Journalf nstitutionalnd TheoreticalconomicsJITE)151/21995), 86-303Zeitschriftür iegesamtetaatswissenschaft

Institutionsffect airness: xperimentalnvestigations

by

Bruno S. Frey and Iris Bohnet*

Fairness is not an absolute value independent f social conditionsbutdependson thereigningnstitutions. onducting experimentswithultimatum, ictatorand prisoner'sdilemma games it is demonstrated that the extentof fairness

systematically epends on three typesof institutions:propertyrightswhichdefine the basic fairnessnorms; the extent of interactionbetween theplayers(anonymity,dentification r talk) whichdetermineshow far these norms areactivated, nd theplayers'opportunity et which affects he extent o which the

players an actively nfluence hegame outcome. It is a plea forthe fruitfulnessof "institutional xperiments." JEL: A 13, C 70, C 90)

Fairnesssnotan absolute alueexistingndbeingpursued ndependentlyfsocialconditions. ather, he extent ffairness xhibitedystematicallye-pendson institutionshaping heperceptionsnd possibilitiesf behaviour.Drawing nexperimentalvidence, e areable to show hat,n the ontext fultimatum,ictatorndprisoner's ilemma ames, here re threemportanttypes finstitutionsffectingairnessThe underlyingroperty ightswhichdefine hebasicnorms ffairness;he xtent f nteractionetweenheplayersin thegame anonymity,dentificationrtalk)which eterminesowfar hesenorms reactivated; nd theplayers' pportunityetwhich ffectshe xtent

to which heplayers anactivelynfluencehegameoutcome.Ouranalysis sthus plea for strongermphasis n "institutionalxperiments"n whichinstitutionsre systematicallyaried n order o study he effectsn humanbehaviour.

* We are grateful o theothermembers four researchgroup,namelyReiner Eichen-

berger,sabelle Busenhart nd Felix Oberholzer,fortheir

helpin

undertakinghe

exper-iments.We thank them as well as the referee or criticalcomments.Parts of thispaperwere presentedat research seminarsat the Universitiesof Basel, Duisburg, Konstanz,Innsbruck and Limburg Maastricht), and at the European Public Choice Conference,University f Valencia. We thank the Stiftungfür wissenschaftliche orschung an derUniversitätZürich and the Zürcher Hochschul-Verein fortheir financialsupport.







151/2 1995) Institutionsffectairness: xperimentalnvestigations 287

/. FairnessnTheoryndEmpirical esearch

For a longtime, airness as beenconsidered o be a purely hilosophical rethical onceptwithout elevance or conomicnalysis. conomistsmayhavesensed hat airnesslays role ndaily ifeandhavebehaved ccordingly)utthey ave shied wayfromntroducingairnessntotheirmodelsbecause theconcept eems ll-definedndspurious.As Sen [1987, ]writes: If one exam-ines hebalance f mphasesn thepublicationsnmodernconomics,t s hardnotto notice . ] theneglect f the nfluence f ethical onsiderationsn the

characterizationfactualbehavior."Nevertheless,nglo-Saxonmoral cience

especially as had some effect n welfare heory. awls' [1971]conceptof"Justice" r "Fairness"has beendiscussed y philosophically inded cono-mists uch s Buchanan [1976],Baumöl [1986] ndSen[1987]. n other artsofeconomics,races f fairness rclosely elated onceptshavealwaysbeenpresent,xamples eing altruism"which .g.plays role nBecker's[1981]Treatise n theFamily), nd moregenerallyocialnormsseee.g.Opp[1983],Elster [1989],Coleman[1990] nd especially or heroleofcognitive isso-nanceSchlicht [1984]).

Empiricaltudies n fairness avebeen venrarer han heoreticalnvestiga-

tions. ndeed,until uite recently,conomists ave made no effortt all toidentifympirically hat "fairness"might e. Interestinglynough, he firststudieswere romptednthe ontext f the iteraturen "behavioural noma-lies" (see Thaler [1992],Frey and Eichenberger 1989]).To act "fairly"staken o be non-rationalfrationalitys definedasmost conomists oulddo)in terms f selfish ehaviour. t is even lesscompatiblewithWilliamson's[1985] "opportunism" here ndividuals re assumed to actively xploit llpossibilitieso raisetheir wnutilityvenat other ersons' ost.

From thevery eginning,tudies f"empirical airness" ave usedexperi-ments. wo types fexperimentalpproaches an be distinguished:atural

experimentsnd laboratory xperiments.(1) Innaturalxperiments,cholars avemade n effortoput he ubjectsnto

as realisticituationss possible sing epresentativeamples f thepopu-lation.The first uch tudywas undertakenyKahneman,Knetsch andThaler [1986a], ppropriatelyalled "Fairness s a Constraint n ProfitSeeking."n a telephone urveynthemetropolitanreas ofToronto ndVancouver, 07 personsweretested bout their eaction o a situationwhere hepricefor good(snow shovels)was increased na well-definedexcess emand ituation.t turned ut thatnot essthan 2percentonsid-

eredthepricerise o be unfair.This studywas replicatedby Frey and Pommerehne1993] for themetropolitanreas ofZurich nd Berlin.Among he215persons espond-ingto a writtenurvey resentinghe same excessdemand ituation, 3percentonsidered herise npriceunfair.When he amesituation,uta







288 Bruno . Frey nd risBohnet JJDTTIE

differentood water),wasputbefore hepersons, 8percent houghtheprice ise o be unfairN = 452).The institutionaletting as also variedby comparinghepriceriseto an allocationusing ther ecision-makingprocedures. he resultwas thata somewhat ower share 73 %) of therespondentsound pricerise to be unfair, ut that an allocationby"tradition"theprinciplef"firstome,firsterved")was considered ymanyesspeople 24%) to beunfair. ven an allocation y dministrativeproceduresbythe ocal authorities) as taken o be less unfair57% ofrespondents)hanpricing. similartudywas undertakenn thecontextofevaluatinghe cceptabilityfproceduresor iting noxious acilityamedium-nd low levelnuclearwasterepositoryn Switzerland)Ober-holzer, Frey,Hart and Pommerehne1995]). Amongthe 900 personsinterviewed,hefollowing anking as established:

Table Í

Acceptabilityf Various rocedures

Procedure Shareofpersons indingtheprocedurecceptable

Negotiations 72%

Referenda 39%Expert ecision 34%Lottery 32%Willingnessoaccept 20%Willingnessopay 4%

Source:Oberholzer, Frey,Hart and Pommerehne1995].

Both heprice ystem,n theformfthewillingnessoaccept r topay, swell s therandom rocedurelottery),urnedut to have a lowdegree facceptability,hilenegotiationsndreferendaaredmuchbetter. more

detailed nalysisrevealed hat"acceptability"onsists f three ompo-nents: security,"local influence"nd "fairness."t transpiredhat herankingn termsf "fairness"xactlymirroredhe boverankingn termsof acceptability.he twosurvey xperimentshusyielded uitesimilarresults.

(2) The second ype fexperimentsealingwith airnesss undertakenn thelaboratory.n the ocialsciences,aboratoryxperimentsere irst sed npsychologyutare nowrapidly aining ecognitionneconomics.1Mostrecentxamples reFehr andKirchsteiger 1994],whoanalyzefairnessin abourmarkets,rRabin 1993]whostronglyrgues or he nclusion f

1 While trongholdsre now lso n theUnited tates,ee Roth [1988], lott [1990],Smith 1990], 1994], mportant recursors ere n Frankfurt,ee SauermannandSelten [1959], elten [1960], auermann 1967].







290 Bruno . Frey nd risBohnet JJIME

regardeds a gift.As a consequence,heproposal hat omethinglarger hanorequaltozero) spassedontoanother ersonsquitenatural.ndeed, nthiscasefairnessuggestshathalf sgiven o the ther erson ecause he llocatorhas nospecial right"o the um fmoney. hepropertyightituationsquitedifferentf the llocatorhasearned he um ofmoney yhardwork. n thiscase,the normoffairness oes not mply hat nythings given o anotherperson. mpiricalvidenceuggestshat nly small hareof earned ncomeisgiven way.UK data on "charitable onations nd subscriptions"n 1974showsthaton averagepeople give away ess than1 percent ftheir ncome(Collard [1978,93]). For the U.S. a somewhat igher ercentagehare ofdisposable ncomecontributeds reported:n the sixties nd the seventiesAmericans onatedon average % of their ncomeVickrey 1975,154]).

Propertyights aybe classifiedccordingothe xtent o whichheynducefairness orms :

(1) Undefinedropertyights:When he llocator eceives oodswhosepro-prietorannotbe specified,henorm o share quallywith herecipientsstrong. nexamplewouldbe a personwho finds n objecton thebeach,perhaps rom ome far wayand unknownhip.

(2) Propertyights efined yluck: When the allocatorreceives good by

fortune,henorm f fairnesslearlys that substantialhare spassedonto theother erson.Anexample f this sprovided ygamblingasinos,where hewinners ften iveratherarge ipsto thecroupiers.

(3) Propertyightsefined ya gift:A gift eceived which s the ase intheDictatorGame- is accompanied ya fairness orm uggestingtransferofsomepositivemount fmoney o therecipient.

(4) EarnedpropertyightsWhen he umofmoney as beenacquired yanexpense feffort,t s considered o be fair or he llocator okeepmostof t. Theexact harewhich, ccordingo thefairness orm,maybekeptdepends n furtherspects. he "normativeight" okeep large hare s,

e.g., argerwhen he allocatorhas expended heeffort imself r herselfrather han, ay, nheritedt from heparents. imilarly,he normativeshare slargerwhen he umhas been cquired yputtingn abourratherthanby derivingncome rom apital.

The normsnduced ypropertyightsan be related o"equity heory"seeWalster, Walster and Berscheid 1977]).The larger n individual'snputintoobtaining good,themore quitableorthefairer)s it for hem o keep

2 ComparetheapproachbyBinmore nd Samuelson 1994],whoarguethat theinducementf norms

ependsnwhether ecisionsnthe

aboratoryre taken nthe

"short erm,"where ndividuals sea social norm cquirednreal ife, r in the longrun"whereearning y aboratoryxperiencemaycreatenew norms.All experimentsdiscussed ere re one-shot ituations ithnexperiencedubjectswhere eal ifenormsshould eactive. he ssue fpropertyightsnducingocialnorms s also discussed.g.inHume 1978] nd Sudgen [1986].








a large hareof thebenefitserived. hese nstitutionalharacteristicsf thefairness orm re crucialfor he outcome f DictatorGamesbuthave beenneglectedn muchof the iterature.irst tepsto experimentallyestfor herelevancefpropertyights ave beenundertakenyHoffman nd Spitzer[1985]. n theirxperiments,llocatorswere skedtochoosebetween divisionwhich avethem 12andthe ecipientsothingr an outcomewhere 14weretobe divided utwherehedivision ad to be decided ponbythe woplayers.As expected, heplayers greedon dividing hebigger take. The divisionchosen,however, as not theonerationallyxpected ut an equaldivision f$ 7 each. Propertyights ariations how that thisresult s not stablebut

depends n the xtent o which he allocative ight"sassignedo oneperson.The authors istinguishour reatmentonditions: llocatorsre determinedbytheflip fa coin and told that hey re nowdesignateds allocators i) orthattheyhad now earned theright o be theallocator ii); allocators redeterminedywinning simple ame nd toldthatnowtheyweredesignatedas allocatorsiii)or thatnowthey ad earned herightobethe llocatoriv).No significantifferenceouldbe observed etween imple uck flipofthecoin)and uck ccompanied y ome mall mount feffortgame).Allocatorswhowere oldthat hey arned heir osition, owever, ept ignificantlyore

moneyor hemselveshan ndividuals ho were

designatedychance s allo-

cators.FurtherxperimentsHoffman,McCabe, Shachat andSmith 1992])supporthese esults. hestrongerhepropertyightshat reassigned,he esslikelys an equal division,.e. the essmoneys passedon to therecipient.

The outcome f theDictatorGame (and, as we shall showbelow,ofanyFairnessGame),however,ependsnotonly npropertyightsut lso ontheextent f social nteraction.

3. Interactionetween articipants

The morepeople nteract,hehighers theprobabilityhat airness orms reactivated ecause ocial sanctions ecome restrictionnindividuals'ctions.Three nstitutionalharacteristicsf nteractions aybe distinguished:

(1) In ananonymousetting here he llocator ndtherecipiento notknoweach other, he fairness orms emain n thebackground. heyareonlyrelevantn so far as theallocatorhas a purelyntrinsicmotivation3 obehavefairly. his is thesituation f perfectompetition,nd is alsoappropriaten manyother ituationswhere largenumber f peopleinteract.t correspondso the"classic" fairnessxperiments.

(2) When he llocator nd therecipientdentifyachother,n the ense hatthey now heother ersonbutare unableto speakto oneanothernon-

3 Forthe oncept f ntrinsic otivationeee.g.Deci [1971], taw [1976].







292 Bruno . Frey nd risBohnet «DOTTE

verbal ommunication),hefairness orm sactivated. heprice rcostofacting elfishlys therebyaised.Manycases come to mind where hissituationspracticallyelevant. ne is free idingnrailways rtramwayswhere he threat f dentifications certainly relevantmotive ormanyriders o paytheir are.Other xamples recharityollections here heorganizersmakean effortoidentifyhedonorsby e.g. passing roundlistofsignatures ith he mountgiven.

(3) When he llocators nd receivers ay alk o eachother, eexpect hat hefairness ormswillbe stronglyctivated. he priceofacting elfishlyssignificant.n the case ofthe DictatorGame,therecipientas a stronginterestnmaking lear o the llocatorwhat henorm ffairnesss. Verbalcommunications ofgreatmportancenall areasof the conomy eyondperfectompetition.ndermonopolisticompetition,hebuyersnd sell-ershaggle bout theprice nd,as Adam Smithhad already ointed ut,there s a strongncentiveo talkaboutwaystorestrict arkets. eyondeconomic ransactions,alkmaybe evenmore mportant.n politics, orinstance, iscourses mostprominent;ierarchiesbureaucracies)re al-most efinedy n endless treamf essions ndmeetings,ndbargainingessentiallyonsists f talk. n all these ases,the verbal ommunication

giveshe

opportunityo activate orms f fairness.4

Ourexperimentstronglyupport he mportancef this nstitutionalaria-tion.Theexperimentsereundertaken ith 40studentst theUniversityfZurich nNovember, 993. The subjectswere conomics tudents t theverybeginningf their tudiestheir econdweek).As theUniversityf Zurich sratherarge morethan20,000students),hesubjectswere n generalnotacquaintedwith achother,ndan effort as made to separate tudents homight ave knowneach otherpriorto takingup their tudies.There s apositive, utnotvery arge, hancethatthesubjectswouldhave significantpersonal nteractions itheach other n thefuture. he experiments ere

conducteduringectureime ndwerenot nnounced eforehand;articipa-tion was neverthelessoluntary. ess thanfivepercent f theprospectiveparticipantshose to optout. The procedure f theDictatorGamewas ex-plainedn a writtenext nd alsoverbally,nd thereafterhe est ersons ouldaskquestions fclarification. e then ormed roups f twopersonsonetheallocator, ne therecipient)yusing randommechanism.he allocatorwasgivenCHF 13.00to choosethedivision e or shepreferred.hemoneywasgivennchipsof CHF 0.50piecesofgamemoneywhich orrespondedo 50centor Rappen piecesof Swisscurrency).n order o make theexperimentrealistic,he llocator adtoput hemoney iven o the ecipientn anenvelope

4 Thè (anonymous) efereeightlyointed ut that he tructuref interactione-tween heplayerss alsoconnected ith ocialgroups. hetheoryfself-categorizationindicateshat heformationfsocialgroupss nterrelatedith he mergencef differ-entfairnessormsseeTurner [1987]).








so that therecipientctually eceivedmoney.The allocators'decisionwassecret,.e. couldnotbe observed yother est ersons orby he xperimenters."Fairness"was definedo be thepercentagehareof norm ulfillment.fe.g.thefairnessorm sequaldivisionCHF 6.50 for ach),and the llocatorweretopass on 3.25,fairnessquals 50%.

The theoreticalredictionf gametheory ased on selfish ndividuals sstraightforward:he allocator eeps hewhole mount orhim- rherself,.e.F* = 0%. It shouldbe noted hat his ame heoreticredictions ndependentof whetherhegroupmembersreanonymous,dentifiedr can talkto eachother, ecause communicationhouldhave no effect s longas no bindingcontractsan be formed.5he result fthe xperimentasquitedifferent.nananonymousetting,naverage he llocators n the39groupsN) passedonCHF 3.38 of themoney nitiallyeceivedwhich orrespondso 52% of thefairness orm fequal division. his amountdiffersrom hegametheoreticpredictionnd we conclude hat here xists n intrinsic otivationo followfairness orms, ut that hismotivations notsufficientlytrongo meet hefairness orm fequal distributionompletely.

Identificationf allocator nd recipient as achieved n theexperimentymaking hem tandup butpreventingerbal ommunication. urpredictionbased on the effect fthe activation f the fairness orm s borne out. OnaverageN = 28),the llocatorhandedhalf f the ntial umto therecipient,i.e. metpreciselyhefairness orm elevantnthecase ofa giftF = 100%).Thefinal nstitutionalariationwas togive he wopersons f eachgroup hepossibilityoverballyommunicate ith ach other nprivate or enminutes.The norm-activatingffectgain tookplace. On average, he17 allocatorspassedon CHF 6.25 of their nitial iftF = 96%).

As interactionroves ostronglynfluenceairness, ewonderedf ubjectsthemselvesxhibited demandfor his nstitutionalossibility.Wethereforeran nother ictator amewith 6subjectswhere he tudentsould choose f

they referoplay

thegameanonymously

r to talkwith he otherpersonbefore he ctual decision ookplace. Eighty-sixercentf therecipientsnd

75percentf the llocators hose communication.hefreelyommunicatingallocators assedonCHF 5.70 F = 88%) of their nitial iftwhich s slightlyless than ntheforced ommunicationettingwhereCHF 6.25 weregiven otherecipient).6

5 Theconcept f"cheaptalk" s discussednFarrell [1987],Crawford [1990], ndJohnson19931.6 Furtherxperimentshere heprice f communication as variedp = CHF 0.00,

reportedbove;

p= CHF 3.00 with44

subjects,= 103%;

p= CHF 5.00 with32

subjects, = 100%) revealed relativerice ffect,.e. themore xpensiveommunica-tion s,the ess ubjectshoose this ption.They onfirmed,owever,hat ommunica-tion nduces he llocators oconvergeothenorm fequaldivision. hese upplemen-tary xperimentsere artlyonducted ith on-economicstudentsfhigheremesters.For moredetails ee Bohnet and Frey[1994].







294 Bruno . Frey nd risBohnet JUTIITE

Eventhoughheresultsupporthe mportancef norm ctivation, e triedto find ut fthe ubjects articipatingn the xperimentslso attributedheirbehaviour o norms.At the nd of the xperimente thereforeandedout aquestionnairesking fthefinaldecisionwas influencedy communicatingwith heother erson nd if o why.Thefollowinguestionswere sked:

(1) Wasyourdecision nfluencedyone or bothof thefollowingwo state-ments?- I hadalreadyknown heother ersonbefore he xperiment.- I liked heother erson.

(2) Whatdidyouachieveby communicatingith heother erson?- It helped o understandheproblem.- I feltmore omfortableecidingfter avingpoken o the ther erson.- I learned bout theother erson's ttitude.- Weagreed n a specific istribution.- I felt ikemaking bindingontract.- I improved yposition.

While the first et of questionshas the character f controlvariables("known" nd "likeable"), he secondpartof thequestionswas inspired ydifferingommunicationheories.t s oftenrguedSiegenthaler 1993]) hat

themainfunctionf communications to clarifynd structureheproblem("understand")herebyeducingncertaintyndpsychic ecision-makingost("comfort"). he variable attitude" rawson the dea thatpeoplemaybedistinguishedccordingo their referencesndthat ommunicationelps olearn the "beliefs" and "wants" of the otherperson Schofield [1985])."Agree" nd "binding" epresenthenorm ctivation ffect.Weargue hat tis one clearly efined istributionfthe CHF 13.00whichunder hegivencircumstancess relevantor ecision-making,ndthat his istributionf thecakerepresentsbinding orm. Improve" ests or he ommunicationffectascribed y nformationconomics, iz.,thatmore nformationncreases he

quality f the decision nd therebyn allocator'spositionStiglitz [1984]).The answers f thecommunicatingllocators rereportedelow.

TableThe Role ofCommunicationntheDictatorGame

Variable "Yes"-answersfrespondents numberf observations(percent)

Known 10.9 92Likeable 31.0 84Understand 21.7 83

Comfort 34.4 90Attitude 67.8 90Agree 80.7 88Binding 67.8 90Improve 43.5 92








According o thesurvey,ommunication ainly erves o learn bout therecipient'sttitude nd to makebindinggreements.he modal offerwheresubjectsgreed s an equal split n all communicationxperimentsnd,as thehigh airnesscores how,has been binding."Allocators lso seem nterestedinrecipients'ttitudes owards heproblemt hand. Furtherestings neededtodistinguishhich ttitudesrepositivelyanctionednd which nduce llo-cators o be essfair. ommunications notusedtoclarifyhe ask ince olvingdistributionaluestionsmight otbe somethingnusual. harings an every-day activitynd subjects rient hemselvesy relyingn everydayharing"rules."

4. TheOpportunityet of Players

In thecontext f twopersongameson fairness,wo nstitutionalariationsbearing n theplayers' pportunityet can be distinguished.

(1) The allocator ecidesunilaterally;herecipientas no power o act. Thisis theDictatorGame DG) considered o far.

(2) Therecipientanrejecthe llocator's ivision. fhe or sherejectshe harereceived, either fthetworeceivesnything.f therecipientccepts he

division,hen achgets herespectivehare.This s the Ultimatumame(UG).7 Compared o theDictatorGame,the llocatorhas a reducedex-pected) pportunityet becausehe or she must eckonwith rejection ya dissatisfied r vengeful ecipient.n the languageof biologists,uchinsistence n fairness ormseven fall individualswillsuffer)s called"moralisticggression"see Trivers[1971]).The allocatorwillthereforetend o pass on morethan n theDG inorder o induce herecipientoaccept.Game theory ased on theassumptionfselfish layers redictsthat rational llocator ffers,the mallest ossibleunit inourexperi-ments 0cents)becausetherecipients better ff fthey ccept his hare

than hey re inreceiving othingnthecase ofrejection.If fairnessorms re taken eriously,hepredictionepends n theproperty

rightsituations discussed nsection . In the ase ofan Ultimatum ame nwhich he llocator eceives he umofmoney s a gift rom he xperimenter,theunderlyingairness orm s equal division. he allocatormust ake ntoaccount hat herecipientticks o thisnorm nd rejects nydivisionwhichviolates t. Thus, theamount of fairness n theUltimatumGame maybeexpected o be larger han that n the DictatorGame. The extent f socialinteractionanonymity,dentification,ommunication)houldnotexhibitny

7 The Ultimatum ame is due to Güth, Schmittberger nd Schwarze [1982].Furtherxperimentsith heUG have beenundertakeny e.g. Binmore,hared andSutton [1985].Surveys f theexperimentalesigns nd results regivenbyThaler[1988],GüthandTietz [1990],Güth,WarnerydandLea [1992] resent collectionfmajor rticles.







296 Bruno . Freynd risBohnet JETTE

significantffect n fairnesss long s propertyightsreclearly efined ndas longdivergencean effectivelye sanctioned.

Theresults fourexperimentsre consistent ith his heoreticalrediction.Indeed, he fairness orm fequal divisionF*UG 100%) is reachedn allexperiments.n anonymity01% (N = 28) is passedon, undernon-verbalcommunication00% (N = 11)and when alk sallowed100% (N = 27).Therestrictionf the allocator'sopportunityet by the fear of rejections soeffectivehat hefairness orms always chieved venwhen he ubjects renotable to communicate ith ach other. n DictatorGames,on the otherhand,fairnessf100% is only chievedftheplayers re either dentifiedr

may alk o one another. airness nder nonymousonditionsssignificantlylower n the Dictator Game (IfoG 52%) than in the UltimatumGame(FUG 101%, withp < 0.001 F = 31.60).

This trategicifferenceetween ltimatum ames nd DictatorGameshasalso beenobserved yForsythe,Horowitz, Savin and Sefton [1994] ndBolton [1991].While these authors nterprethe differencen offers s arejectionfthe fairness ypothesis," eargue hat hemodal offer fequaldivision n theUltimatum ame cannot be explainedwithout ecurringofairness orms. here s no other oodreasonwhy he hare hosen houldbean exactlyven plit f the ake.Interestingly,hepossibilityo"punish" heallocatorhas an equally trong ffect n convergingo the fairness orm sdoes communicationwhen osuchpunishmentxists). wosanctioning ech-anisms eem oberelevant: ocial sanctionsctivated y dentificationr talkin theDG, andmonetaryanctions nabledbytherejection ossibilityntheUG.

The importancef both social sanctionsinteractionffect)nd monetarysanctionsopportunityet ffect)orncreasingairnesssstressedy multipleregressionnalysisOLS) drawing n datafrom hequestionnaire.s we hadenlargedursamplebynon-economicstudents fhigheremesters,e askedall

subjectsoreport

n severalersonal

haracteristics:conomicsmajor

ornot ecomajor); irstemesterrnot fìrstsem);ex sex)andreligionreligion)as well s whetherhey adanypriorknowledgef thegame knowledge)ndwhetherhey elt ny ocialpressure hiledecidingsocpress). heresultsreshownntable3.

The resultstronglyupport herelevancef nteractioncomm-usedqualsidentificationlustalk) ndof the pportunityet game-type).nterestinglytalso matters hether student tudies conomics r not ecomajor). airnessincreases f allocatorsmaycommunicate ith herecipients,fthey layanUltimatum ameand ifthey renot economicsmajors.

The effect f socialsanctions n fairness as so farnotbeensystematicallyanalyzed or heDictatorGameor theUltimatumame seeRoth [1993]). he

importancefcommunication,owever, as beendemonstratedor heUlti-matumGame by consideringejection requenciesRadner and Schotter[1989]).Whencomparing nonymous argaining, argaining y computer








Table3Determinantsf FairnessnDictator nd Ultimatum ames OLS Estimate)

Variable Parameter t-value

Constant 5.53 12.22Comm-used 1.52 4.42Game-type 0.83 2.10Sex -0.41 -1.08Ecomajor -1.12 -2.85Firstsem 0.13 0.35Religion 0.89 1.65

Knowledge -0.79 -1.10Socpress -0.49 -1.15

(N = 295,R2= 35.7%)

communicationnd face-to-faceargaining,he authors eport hatface-to-face ommunicationxerts significantegativeffectntheprobabilityfanoffer eing ejected ytherecipient.

The UltimatumGame has a similar tructures a Step- evel Prisoner'sDilemmaSLPD) with especto theplayer's pportunityet.While ntheUG

an implicit ormdetermineshepoint t which n offerwillbe accepted i.e.where cceptancesprovided),n theSLPD an explicithresholdrprovisionpoint stablisheswhen hepublicgood willbe provided. mpirical videncesuggestshat,knowinghispoint,ndividualsontribute ore han na (nor-mal)Prisoner's ilemmaPD) 8where achplayer as a strongncentiveo freeride nd where hedominanttrategyclearlys not tocooperate.n a gamewithprovision oints,however,here xistmanynon-cooperativequilibria,each of whichmaybeoptimal utnoneofwhich sdominant.Wehypothesizethat, imilar o theUG, subjects hoose a solutionwhich eflectshe ociallydominantairness orm fequaldivision f the ost ofprovidinghe tep-levelpublicgood (C* = 100%).

Thecontributionna normal D, on theotherhand, s expectedodependagain on theextent f interactionetween heplayers: n anonymityhecontribution illbe lower hanwhen dentificationakesplacebecause nthelatter ase thenorm fcontributingairlys activated.Anevenhigherxtentofcontributionspredicted hen heplayersanspeaktoeach other.Notonlydoes verbal nteractionctivate hefairness orm, uttalk also enablestheparticipantsocoordinate heirctions y greeingn a common trategy.hegametheoretic redictionor a one-step D based on selfish ehaviour scomplete ree-riding,.e. no player t all is prepared ocontributeo thecost

ofprovisionC* = 0%).

Forexperimentalvidence ee thereviewnLedyard [1993, h.3.1].A strategys dominantna gametheoreticense f tmaximizes hereturn o an

individual o matter hat ther layers o.







298 Bruno . Freynd risBohnet JJfflTE

Weran step-levelublic ood experimentnApril 994, gainwith tudentsof theUniversityfZurich.10 qual division f the cost ofthepublicgood(CHF 4500,thecopyrightor opying hemanuscriptf a notyetpublishedbook)wouldhavebeen bout CHF 20-25, dependingn the xactnumber fpotentialontributionsaround 00persons)which heplayersnvisaged. heresult ftheexperimentas an average ontributionf CHF 21.60 which sconsistent ith urprediction. correspondingnormal) D experimentield-ed a much ower ate fcontribution,amely nlyCHF 3.80,or 15 to20% ofthenorm fequal division.

This result s supported ya Prisoner's ilemmaGame conductedn thecontext four xperimentsunnOctober, 993.Forthe urpose f xperimen-tation, specificour erson amen was chosen. ach ofthefour layers adto decidebetween andY.These hoiceswerenot dentifiedormativelyith"cooperation" nd "defection,"espectively,n purpose.The collectiveut-come, owever, as best f ll four hoseX, and worst f ll choseY.ChoosingY insteadof X lead to a gain for therespective layerof CHF 6.50 andproduced costofCHF 3.00for verybodylse.The decision ocooperate,ntheotherhand,costa subjectCHF 9.50 and createdbenefits or ll players(includinghe ooperators)mountingoCHF 3.00.Thepay-offtructurehus

stronglypunished"ndividual

ooperatorsX),and

gavea

strongndividual

incentiveodefectY).When hePD gamewasplayed ompletelynonymously,he hare fcoop-

erating layerswas 12% (N = 43).Whennon-verbalommunicationhroughidentificationasallowed, hefairnessorms were ndeed ctivated s now23% (N = 16)chose he ooperativetrategy. hen he our layersouldtalkto eachother,ooperationose o78% (N = 26).Theoutcomes f both ypesof interactionifferignificantlyrom he result chievedn an anonymoussettingwith dentification: = 0.033; F = 4.60, and with talkp < 0.001F = 207.61).Our experimentalesults cho previous esearchwhereverbal

communication etweenplayerswas admitted n PD games. Dawes,McTavish and Shaklee [1977] nd Dawes [1980]report hat n their ight-person ames ooperation osefrom 1% to72% when alkwas allowed forsimilar utcomes ee e.g. Orbell, Van de Kragt and Dawes [1988], saacandWalker [1988] r Calvert [1993]).

10For an exactdescriptionf thedesign nd full esults eeOberholzer, Eichen-berger,Bohnet and Frey 1994], eealso Schneider ndPommerehne1981].11 It correspondso theexperimentesigned yDawes, McTavish and Shaklee

[1977]but has beenreduced rom to4

players er groupn order o increase he ize

of the amplefor hedifferentxperimentalariations. he structurefthepay-offs,however, as unaltered. heexperimentalesignsfully resentedn BohnetandFreyi19941.

1 For theroleof fairness ormsnprisoners'ilemmasee theformalpproachbyHolländer [1990].







151/2 1995) InstitutionsffectairnessExperimentalnves igatons 299

5. Conclusions

We havetheoreticallynalyzed he ffectsfvarious nstitutionalariations nfairnessnd havepresentedupportingxperimentalvidence n ourproposi-tions. nstitutionsere ystematicallyaried longthree imensions:

(1) Thepropertyightso the umofmoney o be distributed.heydefine heunderlyingormf airness. urown xperimentsssumedin inewith heoverwhelminghareof the iterature)hat he nitial um ofmoneywas agift rom he xperimenter,nd that hefairness orm n that ase isequal

divisionmong heparticipants.n the ase offairnessamesDictator ndUltimatum ame),thismeans hat he llocator asseson half fhisor herendowmento therecipientF = 100%); in thePrisoner's ilemma thefairnessormmplies hat he ost ofprovidinghepublicgood isequallyshared nd that llplayers articipatei.e.choosethe ooperative trategy;C = 100%).

(2) The interactionetweenhe articipantsaries he nstitutionalossibilitiesto act in an anonymous etting,o be identified,r to talk to eachother,whichn ncreasingrder ctivatesheunderlyingorms f airness.n thecase of thePrisoner's ilemma, alk also enablesthe ctors o coordinate

their ehaviour or heirmutual enefit.(3) The actors'opportunityet s determinedythe existence f a provisionpointwhichstablishes hen n offersacceptedUltimatumameamongFairnessGames) or whena public good is supplied Step-Level ariantamongPrisoner's ilemmaGames).

Theresults f the nstitutionalariationsnourexperimentsor he ase ofa particularroperty ightstructuregift) representedn the table below.

Table4Institutionalariations nd Experimentalutcomes

Opportunityet ofPlayers

Provision oint No Provision oint

Ultimatum Step-Level Prisoner's DictatorGame Prisoner's Dilemma Game

DilemmaF C C F

Institutionsor

Social Interaction-Anonymity 101% 100% 12% 52%- Identification 100% 23% 100%- Talk 100% 78% 96%

Source:Ourexperiments.







300 Bruno . Frey nd ris Bohnet JJUTTEE

Theexperimentalutcomesuggesthat nstitutionalariations ave a sys-tematicndmajor ffect n fairnessehaviour.We find hat nstitutionalon-ditions eterminingspecific rovision oint nduce air ehaviours definedbytheunderlyingropertyightstructure.n both the Ultimatum nd theStep-Level risoner's ilemmaGame the outcomefully orrespondso thefairnessorm,which n the ase ofthegift onsideredsequaldivision.Whentheopportunityetof the ndividualssnotrestrictedy provision oint, hesecond nstitutionalimension,ocial nteraction,omes ntoplay.As can beseen, heextent o which hefairness orm s followed s dramaticallyowerundernonymousonditionshanwhen on-verbalnd verbal ommunication

are permitted. his holds bothfor the Prisoner'sDilemmasettingwherecooperation isesfrom 2% under nonymityo 78% when alk s allowed)and theDictatorGamewhere airnessorrespondinglyncreases rom 2% to96%.

The resultsf ourexperimentshowthat n exact pecificationf the nsti-tutionalonditionsfthe xperimentss ofcrucialmportance.resently, anyexperimentsreat his spect ightlyrdisregardtaltogether. majorreasonforthisneglects thatexperimentsn the social scienceshaveoriginatednpsychology hich tressesmental rocessesnd the orrespondingalues or

preferences),hile heconstraintsnd therewithnstitutions

layittle r no

role.Oneof themajor dvantages f economistsnteringhefield nd under-taking xperimentsaybe their loser onnection ith nstitutions.n partic-ular, conomistsan draw n a well-developedomparativenalysis f nstitu-tionsbuiltupon the rational hoiceapproach.We thusappeal fora closerintegrationf nstitutionsnd experimentsnd believe hat nstitutionalndexperimentalconomicsmayprofit reatlyrom achother, pening p newinsightsor heunderstandingf socialreality.

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ProfessorBrunoS. FreyIris BohnetInstitutür empirischeWirtschaftsforschungUniversität ürichBlümiisalpstraßeW8006 ZürichSwitzerland

1995 institutions affect fairness_experimental investigations

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