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.

Public Goods

Another issue that Fehr studies is the problem of how to provide public goods. When there are a group of self-interested people, they all will want to free-ride on the efforts of others; hence no person will contribute to the public good. An experiment that Fehr conducted was the token game. This is where there are four group members who are each given 20 tokens. They have the choice of whether to keep their tokens or give tokens to the public in which the total amount of public tokens are split four ways. If one donates 1 token then the return would be .4 tokens so it would be in one’s self-interest to keep all the tokens for themselves. But if everyone kept all their tokens, then the highest amount anyone could receive would be 20 tokens. If everyone donated all their tokens, then everyone would earn 32 tokens.

Reciprocity makes a difference in this game. Fehr says that people will be more willing to contribute to the public good if others are also willing to contribute. This also goes the other way; if you are not contributing, then the other agents probably will not contribute as well. Fehr created a new game in which people can punish other agents for free riding. In order to punish, it will cost an agent 1/3 of what they want to reduce the group member’s income by. There must be a cost to the punisher because then self-interested people won’t ever punish, but negatively reciprocal people will punish no matter what the cost because they do not want any free-riders. The punishment will then cause the free riders to contribute because then it will be in their self-interest.

Fehr and Simon Gachter have conducted several experiments using the basic public good game. One of the studies was what they called the Perfect Stranger version versus the Partner version. The Perfect Stranger version of the public goods game was where there were 24 subjects that were divided into six groups of four people. Each would play the public good game for six periods, but after every period the groups would switch so that one player would never play with the same player twice. The Partner version consisted of the same amount of people and groups, but each group played the same people ten times. In the Perfect Stranger version, it is made sure that your actions in one game will not have an effect on future games. Figure one shows how much a subject is punished for deviating from the average contribution of the group. It turns out the more you free ride relative to everyone else the more you get punished.

Figure two shows the cooperation behavior. It compares each of the public good games with and without punishment. When there is no punishment there is less cooperation. In the no punishment Perfect Stranger version, you can see that the agents hardly contribute when the game gets into the sixth period. The game with the most cooperation is the Partner game with punishment. As the rounds go on, agents tend to contribute more.

Fehr believes that social norms are a factor in the public goods problem. His definition of a social norm is “1) a behavioral regularity; that is 2) based on a socially shared belief of how one ought to behave; which triggers 3) the enforcement of the prescribed behavior by informal social sanctions.” He says that people follow the social norm because it is considered a behavioral good where everyone should make a contribution. Many social interactions involve families, residential neighborhoods, and clubs at people’s workplaces. Social norms can affect how people save and consume because people worry about what things are appropriate to buy. Fehr’s view is that human behavior is shaped by social norms and he says that reciprocity is a “norm enforcement device.”