INEQUALITY AVERSION IN A VARIETY OF GAMES—AN INDIRECT EVOLUTIONARY ANALYSIS

Propensities to act in this or that way can be explained by the social or biological environment and the past success of possible strategies (mutants) in it. Studying the evolution of preferences in such a way offers the chance to combine forward-looking deliberation (the shadow of the future focused on by most economists) and ‘path dependence' (the shadow of the past emphasised by biologists and psychologists). What evolves is not behaviour itself but its determinants.

Evolution of preferences has so far been studied in a highly artificial world: a stylised environment with only one type of interaction (a single game) determines biological or social success. But human behaviour or, rather, its basic determinants are not game-specific. Men act similarly in entire, quite general classes of interaction. For example, people usually do not mind exploiting others opportunistically in various types of markets. But they are reluctant to do so when an experimental setting suggests a private affair (even though it is anonymous and single-shot).

To explain how such general indications can evolve, new research by Werner Güth and Stefan Napel, published in the October 2006 Economic Journal, studies evolution in a stylised ‘game of life' that encompasses different game types. The authors illustrate how such a richer habitat can be analysed and point out how conclusions about stable preferences depend on the compound strategic environment. In doing so, they focus on one possible determinant of game-playing behaviour, namely other-regarding preferences in the form of inequality aversion.

The analysis concentrates on distribution conflicts among two parties and well-known procedures for solving them: dictatorial reward allocation and (two or three-person) ultimatum bargaining. These game types have different ramifications concerning the evolutionary (dis-)advantage of inequality aversion, and thus allow the investigation of very general trade-offs concerning social preferences and the crucial issue of game specificity in a fairly simple setting.

Depending on the relative weights of the ultimatum and the dictator game, the study predicts either universal equity or at least partial exploitation of recipients by distributors. The ultimatum game in isolation gives rise to very high inequality aversion and correspondingly generous divisions of available surplus. Presence of the dictator game may, however, substantially restrict offers in the ultimatum game. And a high frequency of the latter can impart benevolence on dictators who in isolation will develop at most a negligible interest in equality.

Equitable divisions are driven primarily by the fact that aversion to disadvantageous inequality (that is, receiving less than others) results in a credible threat to reject small offers. But analysis of the three-person ultimatum game reveals that aversion to advantageous inequality (that is, receiving more than others) can matter, too: it is evolutionarily beneficial to suffer from being better off than a third player because this will extract greater material concessions from the distributor.

It is noteworthy, however, that the seemingly benevolent interest in the third party's lot stops exactly when the distributor starts shifting surplus to the most disadvantaged player instead of offering the considered recipient extra compensation for subjective moral ‘suffering'.

Evolutionary studies of structurally richer habitats can yield more interesting and intuitive results than game-specific evolution. Interestingly, the conjecture that evolutionary benefits of non-individualistic preferences would erode as their domain is extended or as one moves from perfect to imperfect moral discrimination between game types, is only weakly confirmed: inequality aversion that is sufficiently strong to be noticed in ultimatum bargaining is a fairly robust feature—not only in the experimental lab but also in evolutionary microeconomic analysis.

ENDS

Notes for editors: ‘Inequality Aversion in a Variety Of Games—An Indirect Evolutionary Analysis' by Werner Güth and Stefan Napel is published in the October 2006 issue of the Economic Journal.

The authors are in the Strategic Interaction Group at the Max Planck Institute of Economics, Jena, Germany.

For further information: contact Werner Güth on +49-3641-686-622 (email : karin.richter@econ.mpg.de ); or Romesh Vaitilingam on 07768-661095 (email: romesh@compuserve.com).