Ernst Fehr

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Bio

Ernst Fehr is one of the leading experimental economists. He works for the Institute for Empirical Research in Economics at the University of Zurich in Switzerland. He has done many studies and received numerous accolades for his work. His work mainly emphasizes the behavioral aspects of the markets. He does not feel that people live their lives by the self-interest model, meaning that they have a sense of fairness which they apply to their lives and their decision-making.

Reciprocity

Generally in economics it is said that humans will do whatever is necessary to better themselves such as lying, cheating, stealing, and other forms of deception. But one of the points the Fehr tries to prove is that many people are not like that, in fact people behave in a reciprocal way. The definition of reciprocity is generally when someone is friendly to someone else, the other person will be friendly back as well as more cooperative. This is known as “positive reciprocity” Also, if a person is malicious to someone else, it is likely that the other person will be even nastier and crueler in return. This is known as “negative reciprocity.” This also says that people will do nice things for others such as repaying gifts even if it is costly to them and there are no rewards.

Fehr notes that because the world is generally made up of self-interested people and reciprocal people, the reciprocal types control the outcome in certain situations and selfish types will control the outcome in other situations. For example reciprocal types want to punish those who tend to free-ride when the opportunity arises, even if the punishment is costly to the punisher. But because they can punish, the free-riders will cooperate because it will be better off for them not to get punished. Thus it is important to not whether the people who are involved in studies are the self-interest type or the reciprocal type.

One thing to note about reciprocity is that people act friendly or hostile because of a certain act; they are responding to that act. Altruism is when one is kind no matter what; there is no reason for kindness and no expectation for anything in return. Positive reciprocity is found in many different social situations. For example, when someone does someone else a favor for no reason, it is more likely that the other person will do something for the original person in return. Another example that Fehr mentions is that smiling waitresses generally get tipped more than unfriendly ones. The reason for performing the experiments is to see whether the actor will receive a material benefit from performing a reciprocal action.

A good experiment to see the effects of negative reciprocity is the ultimatum game. In this game, there are two players who have to agree on a division of money. The Proposer must choose how to decide to split the money and the Responder must choose whether to accept or reject the offer. If the Responder rejects, then both players receive nothing, and if the Responder accepts, then they receive the offer. Game theory says that the best way to play this game is for the Proposer to take 99% of the money and offer the Responder 1% of the money. The Responder should accept because they both will be better off. But this assumes that both players are the self-interest type. In actual experiments it is shown that if this were the offer, the Responder would reject because it is not fair. In fact, Responders usually only accept offers higher than 30% of the available sum. This type of negative reciprocity is observed in many different countries in the 15 Country Survey.

A good example of positive reciprocity is a trust or gift exchange game. In a trust game, the Proposer receives a certain amount of money and can then offer a certain amount of that money to the Responder. The experimenter then triples that amount of money and gives it to the Responder. The Responder can then return any of that amount to the Proposer. The results show that Proposers do give money and Responders also give money back. There is positive reciprocity.