Steven R. Beckman

Envy, malice and Pareto efficiency: An experimental examination

Abstract Economists have long speculated that envy and malice play important roles in economic decisions. Surprisingly little empirical evidence has been offered in support of such claims. This paper uses experimental and multinomial logit techniques to estimate the effects of envy and malice in economic decisions involving Pareto efficiency. Envy and malice turn out to be powerful motivations with strong differential impacts across countries and relative positions. In some cases, opposition to Pareto gains reaches 60%. Behind a veil of ignorance, however, opposition falls to 10% overall. Pareto efficiency thus garners its greatest support under conditions which can lay claim to greatest legitimacy, those free of situational and personal bias.“... the greater part of human actions have their origin not in logical reasoning but in sentiment. This is particularly true for actions that are not motivated economically.... Man, although impelled to act by nonlogical motives, likes to tie his actions logically to certain principles; he therefore invents these a posteriori in order to justify his actions.”V. Pareto in The rise and fall of the elites (1968, p. 27)

EFFICIENCY, EQUITY AND DEMOCRACY: EXPERIMENTAL EVIDENCE ON OKUN’S LEAKY BUCKET

Income redistribution and its consequences have been the subject of intense debate over the last three decades. This is nowhere better evidenced than in the motivations which are variously ascribed to such redistributions. The social welfare approach, for example, starts from the premise that redistribution of income from the rich to the poor enhances social welfare, a fact from which redistribution derives its motivation. In contrast Tullock (1983, p. 2) argues that the major impetus for income redistribution is simply that the beneficiaries of transfer programs want larger incomes and greater wealth and have the political power to realize their goals. Buchanan (1984, p. 187) finds a constitutional basis for redistribution arguing that, if the voting franchise is universal and the constitution allows collective decisions concerning income transfers, then the basic property right to income in a society inheres in the voting franchise.

Cournot and Bertrand Games

Abstract The author describes a series of matrix choice games illustrating monopoly, shared monopoly, Cournot, Bertrand, and Stackelberg behavior given either perfect complements or perfect substitutes. The games are created by using a spreadsheet to fill out a profit table given the choices of two players. One player selects the column, the other the row, and the table gives the profit of the row chooser. Because each player has a table, each thinks of him- or herself as the row chooser and the other as the column chooser. The games may be applied to international trade through the traditional Boeing v. Airbus story or, more currently, through foreign sales corporations. Addition of Bertrand competition allows discussion of price wars, and addition of perfect complements allows discussion of the proposed Microsoft breakup.

Forecasters as imperfect information processors: Experimental and survey evidence

Abstract One step-ahead forecasts of random walks with four different variances are collected from student subjects. The increasing variance creates a more complex learning environment and engenders forecasts that deviate from the rational expectation. A 1% increase in the standard deviation of information released after the forecast date creates a 0.9% increase in the standard deviation of forecasts from rational expectations. The effect is remarkably strong and is even stronger in survey data collected from professional forecasters. One potential application is the stock market as random shocks undermine consensus and induce volatility which undermines consensus. We also find that deviations from rational expectations are serially correlated.

The Effects of Race, Income, Mobility and Political Beliefs on Support For Redistribution

A questionnaire is used to assess the impact of race, current past and future family income, as well as political beliefs on the support for redistribution. Current income maximization predicts those with above average income oppose redistribution. However blacks support redistribution until income is well above average and whites oppose redistribution even if income is well below average. Those with incomes below average expect to move up and this prospect of upward mobility reduces support for redistribution. The rich are more likely to espouse arguments that protect their wealth. Most intriguingly, as blacks become richer, support for redistribution falls especially rapidly.

RISK, INEQUALITY AVERSION AND BIASES BORN OF SOCIAL POSITION: FURTHER EXPERIMENTAL TESTS OF THE LEAKY BUCKET

The leaky bucket and the transfer principle are tested under conditions of individual uncertainty, behind a veil of ignorance and when positions are known. We find that choices under individual uncertainty are slightly more risk seeking than behind a veil of ignorance indicating that the conventional practice of modeling inequality aversion as risk aversion does not lead to serious error. However, our subjects can not be said to be risk seeking or risk averse but rather protect against downside risks and seek upside gain. As in previous experiments, we find that choices with positions known are quite insensitive to inefficiency and exhibit considerable antipathy to returns that accrue to others, whether richer or poorer. Richer American males are least likely to support leaky-bucket transfers that reduce inequality once positions are known. Lottery players, but not smokers show greater risk preference given individual uncertainty.

Measuring inequality with interval data

This paper employs the axiomatic approach underpinning the literature on income inequality measurement to analyze measures of dispersion in interval data. We find that some widely employed measures fail to properly measure dispersion when data are not of the ratio type. We go on to prove that, under reasonable conditions, variance is the only decomposable measure that can be used to consistently measure inequality of interval data. Moreover, the only proper Lorenz dominance condition for interval data is absolute Lorenz dominance that Moyes [Moyes, P., 1987. A new concept of Lorenz domination. Economics Letters 23, 203-207] introduced.

A Tax and Redistribution Experiment with Subjects that Switch from Risk Aversion to Risk Preference

Bénabou and Ok use expected utility to argue the prospect of upward mobility (POUM) may cause majority rejection of redistributive taxes that benefit the majority. They believe the poor are not risk seeking but instead believe they may soon be rich. In paid computerized experiments that allows redistribution the poor are risk seeking and the rich risk averse even though subjects play both roles. Changing risk attitudes with wealth levels is predicted by Kahnemann and Tversky (Econometrica 47(2):263–291, 1979). Rounds that mimic actual middle class decisions produce desired tax rates over 50% suggesting POUM is only a partial explanation for low taxes.

The sources of forecast errors: Experimental evidence☆

Abstract In Muths original theory, the passage of time is the only source of forecast error. Persistent rejections led Muth to surmise problems in the data also cause forecast error; Keane and Runkle argue that many rejections of Muths theory are reversed if data problems are properly considered. Experimental evidence allows a particularly clean test because the data are inherently simpler. The continued rejection of Muths hypothesis suggests model uncertainty as a source of forecast error.

Producer's dilemma experiments

Abstract Embedding profit motivated producers in a simple macroeconomic model creates a system where expansion by one producer is unprofitable, but coordinated expansions are profitable. In this system any level of aggregate demand is a potential equilibrium: the ruling equilibrium is determined by expectations. Rather than close the model with behavioral assumptions, behavioral observations are made of subjects in this incentive environment.