On the Economics and Biology of Trust

In recent years, many social scientists have claimed that trust plays an important role in economic and social transactions. Despite its proposed importance, the measurement and the definition of trust seem to be not fully settled, and the identification of the exact role of trust in economic interactions has proven to be elusive. It is still not clear whether trust is just an epiphenomenon of good institutions or whether it plays an independent causal role capable of shaping important aggregate economic outcomes. In this paper, I rely on a behavioral definition of trust that enables us to relate it to economic primitives such as preferences and beliefs. I review strong biological and behavioral evidence indicating that trusting is not just a special case of risk-taking, but based on important forms of social preferences such as betrayal aversion. Behaviorally defined trust also opens the door for understanding national and ethnic trust differences in terms of differences in preferences and beliefs, and it suggests ways to examine and interpret a causal role of trust.trust, preferences, beliefs, biological basis

The economics of impatience

In experiments, animals often prefer smaller, immediate rewards over larger rewards that are deferred — thus failing to maximize their total gain. Many people exhibit similar behaviour.economics, impatience

Psychological Foundations of Incentives

Psychological Foundations, Incentives

Social norms and human cooperation

The existence of social norms is one of the big unsolved problems in social cognitive science. Although no other concept is invoked more frequently in the social sciences, we still know little about how social norms are formed, the forces determining their content, and the cognitive and emotional requirements that enable a species to establish and enforce social norms. In recent years, there has been substantial progress, however, on how cooperation norms are enforced. Here we review evidence showing that sanctions are decisive for norm enforcement, and that they are largely driven by nonselfish motives. Moreover, the explicit study of sanctioning behavior provides instruments for measuring social norms and has also led to deeper insights into the proximate and ultimate forces behind human cooperation.Social Norms, Cooperation, Punishment, Reciprocity

How Robust are Nominal Wage Rigidities?

Several studies indicate that firms are reluctant to cut nominal wages during periods of relatively high nominal per capita GDP growth. It has been argued, however, that in an environment with a low nominal per capita GDP growth, i.e., when nominal wage cuts become customary, firms would no longer hesitate to cut nominal pay. To examine this argument we use data from Switzerland where nominal GDP growth has been very low between 1991 and 1997. It turns out that the rigidity of nominal wages is a robust phenomenon that does not vanish but even increases as inflation decreases. Nominal wage rigidity constitutes a considerable obstacle to real wage adjustments. Our estimates indicate that wage rigidity is almost complete for full-time workers who stay with the same employer, but we find little evidence of nominal rigidities for workers who switch employers. We also find evidence that, in the absence of downward nominal rigidity, real wages would indeed be quite responsive to unemployment.

The Incidence of an Extended Ace Corporation Tax

This paper deals with the efficiency and distributional consequences of a switch from the current German income and corporate tax system to one special variant of an intertemporally neutral tax, an extended ACE (allowance for corporate equity) corporation tax. This tax is favoured by the IFS Capital Taxes Group and was implemented in Croatia in 1994. We not only calculate the welfare consequences of introducing the ACE, but also separate the efficiency effects from intragenerational as well as intergenerational redistribution. The quantitative analysis is based on a dynamic simulation model of the Auerbach-Kotlikoff type which distinguishes between five income classes within each generation. The numerical results indicate that such a fundamental tax reform could yield enormous efficiency gains without necessarily increasing income inequality.Corporate taxation, intra- and intergenerational incidence, dynamic CGE modeling

Tastes, castes, and culture: The influence of society on preferences

Economists have traditionally treated preferences as exogenously given. Preferences are assumed to be influenced by neither beliefs nor the constraints people face. As a consequence, changes in behaviour are explained exclusively in terms of changes in the set of feasible alternatives. Here we argue that the opposition to explaining behavioural changes in terms of preference changes is illfounded, that the psychological properties of preferences render them susceptible to direct social influences, and that the impact of “society” on preferences is likely to have important economic and social consequences.Endogenous preferences, culture, caste, frames, anchors, elicitation devices

The nature of human altruism

Some of the most fundamental questions concerning our evolutionary origins, our social relations, and the organization of society are centred around issues of altruism and selfishness. Experimental evidence indicates that human altruism is a powerful force and is unique in the animal world. However, there is much individual heterogeneity and the interaction between altruists and selfish individuals is vital to human cooperation. Depending on the environment, a minority of altruists can force a majority of selfish individuals to cooperate or, conversely, a few egoists can induce a large number of altruists to defect. Current gene-based evolutionary theories cannot explain important patterns of human altruism, pointing towards the importance of both theories of cultural evolution as well as gene–culture co-evolution.altruism, selfishness, human altruism, evolution

Fairness and Retaliation: The Economics of Reciprocity

This paper shows that reciprocity has powerful implications for many economic domains. It is an important determinant in the enforcement of contracts and social norms and enhances the possibilities of collective action greatly. Reciprocity may render the provision of explicit incentive inefficient because the incentives may crowd out voluntary co-operation. It strongly limits the effects to competition in markets with incomplete contracts and gives rise to noncompetitive wage differences. Finally, reciprocity it is also a strong force contributing to the existence of incomplete contracts.

Cooperation and Punishment in Public Goods Experiments

This paper provides evidence that free riders are heavily punished even if punishment is costly and does not provide any material benefits for the punisher. The more free riders negatively deviate from the group standard the more they are punished. As a consequence, the existence of an opportunity for costly punishment causes a large increase in cooperation levels because potential free riders face a credible threat. We show, in particular, that in the presence of a costly punishment opportunity almost complete cooperation can be achieved and maintained although, under the standard assumptions of rationality and selfishness, there should be no cooperation at all. We also show that free riding causes strong negative emotions among cooperators. The intensity of these emotions is the stronger the more the free riders deviate from the group standard. Our results provide, therefore, support for the hypothesis that emotions are guarantors of credible threats.Voluntary cooperation, public good, punishment, emotions, social norms, experiments