Theories of Fairness and Reciprocity

Most economic models are based on the self-interest hypothesis that assumes that all people are exclusively motivated by their material self-interest. In recent years experimental economists have gathered overwhelming evidence that systematically refutes the self-interest hypothesis and suggests that many people are strongly motivated by concerns for fairness and reciprocity. Moreover, several theoretical papers have been written showing that the observed phenomena can be explained in a rigorous and tractable manner. These theories in turn induced a new wave of experimental research offering additional exciting insights into the nature of preferences and into the relative performance of competing theories of fairness. The purpose of this paper is to review these recent developments, to point out open questions, and to suggest avenues for future research

On Inequity Aversion - A Reply to Binmore and Shaked

In this paper we reply to Binmore and Shaked’s criticism of the Fehr-Schmidt model of inequity aversion. We put the theory and their arguments into perspective and show that their criticism is not substantiated. Finally, we briefly comment on the main challenges for future research on social preferences

Extension of Haff's cooling law in granular flows

The total energy E(t) in a fluid of inelastic particles is dissipated through inelastic collisions. When such systems are prepared in a homogeneous initial state and evolve undriven, E(t) decays initially as t^{-2} \aprox exp[ - 2\epsilon \tau] (known as Haff's law), where \tau is the average number of collisions suffered by a particle within time t, and \epsilon=1-\alpha^2 measures the degree of inelasticity, with \alpha the coefficient of normal restitution. This decay law is extended for large times to E(t) \aprox \tau^{-d/2} in d-dimensions, far into the nonlinear clustering regime. The theoretical predictions are quantitatively confirmed by computer simulations, and holds for small to moderate inelasticities with 0.6< \alpha< 1.Comment: 7 pages, 4 PostScript figures. To be published in Europhysics Letter

Binding and Normalization of Binary Sparse Distributed Representations by Context-Dependent Thinning

Distributed representations were often criticized as inappropriate for encoding of data with a complex structure. However Plate's Holographic Reduced Representations and Kanerva's Binary Spatter Codes are recent schemes that allow on-the-fly encoding of nested compositional structures by real-valued or dense binary vectors of fixed dimensionality. In this paper we consider procedures of the Context-Dependent Thinning which were developed for representation of complex hierarchical items in the architecture of Associative-Projective Neural Networks. These procedures provide binding of items represented by sparse binary codevectors (with low probability of 1s). Such an encoding is biologically plausible and allows a high storage capacity of distributed associative memory where the codevectors may be stored. In contrast to known binding procedures, Context-Dependent Thinning preserves the same low density (or sparseness) of the bound codevector for varied number of component codevectors. Besides, a bound codevector is not only similar to another one with similar component codevectors (as in other schemes), but it is also similar to the component codevectors themselves. This allows the similarity of structures to be estimated just by the overlap of their codevectors, without retrieval of the component codevectors. This also allows an easy retrieval of the component codevectors. Examples of algorithmic and neural-network implementations of the thinning procedures are considered. We also present representation examples for various types of nested structured data (propositions using role-filler and predicate-arguments representation schemes, trees, directed acyclic graphs) using sparse codevectors of fixed dimension. Such representations may provide a fruitful alternative to the symbolic representations of traditional AI, as well as to the localist and microfeature-based connectionist representations

On Inequity Aversion - A Reply to Binmore and Shaked

In this paper we reply to Binmore and Shaked’s criticism of the Fehr-Schmidt model of inequity aversion. We put the theory and their arguments into perspective and show that their criticism is not substantiated. Finally, we briefly comment on the main challenges for future research on social preferences.Experiments; other-regarding preferences; inequity aversion;

Use and Abuse of Authority

Employment contracts give a principal the authority to decide flexibly which task his agent should execute. However, there is a tradeoff, first pointed out by Simon (1951), between flexibility and employer moral hazard. An employment contract allows the principal to adjust the task quickly to the realization of the state of the world, but he may also abuse this flexibility to exploit the agent. We capture this tradeoff in an experimental design and show that principals exhibit a strong preference for the employment contract. However, selfish principals exploit agents in one-shot interactions, inducing them to resist entering into employment contracts. This resistance to employment contracts vanishes if fairness preferences in combination with reputation opportunities keep principals from abusing their power, leading to the widespread, endogenous formation of efficient long-run employment relations. Our results inform the theory of the firm by showing how behavioral forces shape an important transaction cost of integration – the abuse of authority – and by providing an empirical basis for assessing differences between the Marxian and the Coasian view of the firm, as well as Alchian and Demsetz’s (1972) critique of the Coasian approach

Screening, Competition, and Job Design

In recent decades, many firms offered more discretion to their employees, often increasing the productivity of effort but also leaving more opportunities for shirking. These “high-performance work systems” are difficult to understand in terms of standard moral hazard models. We show experimentally that complementarities between high effort discretion, rent-sharing, screening opportunities, and competition are important driving forces behind these new forms of work organization. We document in particular the endogenous emergence of two fundamentally distinct types of employment strategies. Employers either implement a control strategy, which consists of low effort discretion and little or no rent-sharing, or they implement a trust strategy, which stipulates high effort discretion and substantial rent-sharing. If employers cannot screen employees, the control strategy prevails, while the possibility of screening renders the trust strategy profitable. The introduction of competition substantially fosters the trust strategy, reduces market segmentation, and leads to large welfare gains for both employers and employees