Armin Falk

A Theory of Reciprocity

This Paper presents a formal theory of reciprocity. Reciprocity means that people reward kind actions and punish unkind ones. The theory takes into account that people evaluate the kindness of an action not only by its consequences but also by the intention underlying this action. The theory explains the relevant stylized facts of a wide range of experimental games. Among them are the ultimatum game, the gift-exchange game, a reduced best-shot game, the dictator game, the prisoners dilemma, and public goods games. Furthermore, the theory explains why the same consequences trigger different reciprocal responses in different environments. Finally, the theory explains why in bilateral interactions outcomes tend to be ‘fair’ whereas in competitive markets even extremely unfair distributions may arise.

Psychological Foundations of Incentives

During the last two decades economists have made much progress in understanding incentives, contracts and organisations. Yet, they constrained their attention to a very narrow and empirically questionable view of human motivation. The purpose of this paper is to show that this narrow view of human motivation may severely limit understanding the determinants and effects of incentives. Economists may fail to understand the levels and the changes in behaviour if they neglect motives like the desire to reciprocate or the desire to avoid social disapproval. We show that monetary incentives may backfire and reduce the performance of agents or their compliance with rules. In addition, these motives may generate very powerful incentives themselves. (This abstract was borrowed from another version of this item.)

Lab Experiments are a Major Source of Knowledge in the Social Sciences

Experimental Economics The disciplines of social science, with the notable exception of psychology, have traditionally steered clear of laboratory. The field of economics, and in particular econometrics, has amassed an imposing arsenal of quantitative and statistical methods for analyzing observational data in assessing economic theory and in making causal inferences. More recently, laboratory experiments carried out under controlled conditions and randomized field experiments carried out under natural conditions have gained some currency as complementary approaches. Falk and Heckman (p. 535) review the strengths and shortfalls of these recent developments. Laboratory experiments are a widely used methodology for advancing causal knowledge in the physical and life sciences. With the exception of psychology, the adoption of laboratory experiments has been much slower in the social sciences, although during the past two decades the use of lab experiments has accelerated. Nonetheless, there remains considerable resistance among social scientists who argue that lab experiments lack “realism” and generalizability. In this article, we discuss the advantages and limitations of laboratory social science experiments by comparing them to research based on nonexperimental data and to field experiments. We argue that many recent objections against lab experiments are misguided and that even more lab experiments should be conducted.

Clean Evidence on Peer Effects

We study subjects who were asked to fill letters into envelopes with a remuneration independent of output. In the “pair” treatment, two subjects worked at the same time in the same room, and peer effects were possible. In the “single” treatment, subjects worked alone, and peer effects were ruled out. We find evidence of peer effects in the pair treatment because the standard deviations of output are smaller within pairs than between pairs. Moreover, average output is higher in the pair treatment: thus, peer effects raise productivity. Finally, low‐productivity workers are the most sensitive to the behavior of peers.

Social Comparison Affects Reward-Related Brain Activity in the Human Ventral Striatum

Whether social comparison affects individual well-being is of central importance for understanding behavior in any social environment. Traditional economic theories focus on the role of absolute rewards, whereas behavioral evidence suggests that social comparisons influence well-being and decisions. We investigated the impact of social comparisons on reward-related brain activity using functional magnetic resonance imaging (fMRI). While being scanned in two adjacent MRI scanners, pairs of subjects had to simultaneously perform a simple estimation task that entailed monetary rewards for correct answers. We show that a variation in the comparison subjects payment affects blood oxygenation level–dependent responses in the ventral striatum. Our results provide neurophysiological evidence for the importance of social comparison on reward processing in the human brain.

Reputation and Reciprocity: Consequences for the Labour Relation

Recent evidence highlights the importance of social norms in many economic relations. Many of these relationships are long-term and provide repeated game incentives for performance. We experimentally investigate interaction effects of reciprocity and repeated game incentives in two treatments (one-shot and repeated) of a gift-exchange game. In both treatments we observe reciprocity, which is strengthened in the repeated game. A detailed analysis shows that in the repeated game some subjects imitate reciprocity. Thus, reciprocity and repeated game incentives reinforce each other. Observed behaviour is robust against experience. We conclude that a long-term interaction is a ‘reciprocity-compatible’ contract enforcement device.

Cross-Sectional Earnings Risk and Occupational Sorting: The Role of Risk Attitudes

This paper investigates whether risk preferences explain how individuals are sorted into occupations with different earnings variability. We exploit data from the German Socio-Economic Panel, which contains a subjective assessment of willingness to take risks whose behavioral relevance has been validated in previous work. As a measure of earnings risk, we use the cross-sectional variation in earnings that is left unexplained by human capital in Mincerian wage regressions. By relating earnings risk to the measure of individual risk preference, our evidence shows that individuals with low willingness to take risks are more likely to be sorted into occupations with low earnings risk. This pattern is found regardless of the level of occupation categories, region, gender and labor market experience. We also find that risk preferences are significant determinant of wages in a Mincer regression, illustrating the importance of preferences and attitudes in addition to more standard regressors.

Homo Reciprocans: Survey Evidence on Behavioural Outcomes*

This article complements the experimental literature that has shown the importance of reciprocity for behaviour in stylised labour markets or other decision settings. We use individual measures of reciprocal inclinations in a large, representative survey and relate reciprocity to real world labour market behaviour and life outcomes. We find that reciprocity matters and that the way in which it matters is very much in line with the experimental evidence. In particular, positive reciprocity is associated with receiving higher wages and working harder. Negatively reciprocal inclinations tend to reduce effort. Negative reciprocity increases the likelihood of being unemployed.

Why labour market experiments

Over the last decades, there has been a steady increase in the use of experimental methods in economics. We discuss the advantages of experiments for labour economics in this paper. Control is the most important asset behind running experiments; no other empirical method allows a similarly tight control as do experiments. Moreover, experiments produce replicable evidence and permit the implementation of truly exogenous ceteris paribus changes. We also discuss frequent objections to experiments, such as a potential subject pool bias, the stake levels used in experiments, the number of observations as well as internal and external validity. We argue that although these objections are important, careful experimentation can circumvent them. While we think that lab and field experiments offer a very valuable tool, they should not be viewed as substitutes but as complements to more traditional methods of empirical economic analysis. D 2003 Elsevier Science B.V. All rights reserved.

Representative Trust and Reciprocity: Prevalence and Determinants

This paper provides evidence about the determinants of trust and reciprocal inclinations, that is, a tendency for people to respond in kind to hostile or kind actions, in a representative setting. We investigate the prevalence of reciprocity in the population, the correlation between trust and positive and negative reciprocal inclinations within person, the individual determinants of reciprocity, and the relationship with psychological measures of personality. We find that most people state reciprocal inclinations, in particular in terms of positive reciprocity, as well as substantial heterogeneity in the degree of trust and reciprocity. Trust and positive reciprocity are only weakly correlated, while trust and negative reciprocity exhibit a negative correlation. In terms of determinants, being female and increasing age are associated with stronger positive and weaker negative reciprocal tendencies. Taller people are more positively reciprocal, but height has no impact on negative reciprocity. Psychological traits also affect trust and reciprocity. (JEL D63, J3, J6)