Balancing Fairness and Efficiency in Repeated Societal Interaction

Balancing Fairness and Efficiency in Repeated Societal Interaction Noam Ben-Asher (noamba@cmu.edu) 1 Christian Lebiere (cl@cmu.edu) 2 Alessandro Oltramari (aoltrama@andrew.cmu.edu) 2 Cleotilde Gonzalez (coty@cmu.edu) 1 Dynamic Decision Making Laboratory, Department of Social and Decision Sciences, Carnegie Mellon University Pittsburgh, PA 15213 USA Department of Psychology, Carnegie Mellon University Pittsburgh, PA 15213 USA it for a while and then the other will have the joy of playing with the desired toy as well. However, if only one of the toddlers gets to play with the toy and the other does not get the same opportunity, feelings of unfairness and frustration that might lead to aggressive behavior when facing similar conflicts in the future can arise. Such social conflicts are well captured in Game Theory using the Chicken Game (CG), as introduced by Russell (1959). According to this game, two drivers are heading towards each other on a single lane road from opposite directions at full speed. Just before colliding, each of the drivers has to choose simultaneously and independently between driving straight towards a possible collision (i.e., Dare) or turning the steering wheel (i.e., Swerve) and avoiding the accident. As represented in the game's payoff matrix (see Table 1), this is a prototypical dangerous game, because a player has to risk the lowest payoff [-10] to have a chance of winning the highest payoff [10]. Under reasonable assumptions for single-trial CG, the best outcome is for a player that Dares while the other player Swerves [10,-1]; the second-best for each is if both Swerve [1,1]; the third-best is for a player that Swerves while the other player Dares [- 1,10]; and the worst for each is if both Dare [-10,-10], because then the outcome is mutually destructive. Thus, the best strategy in single-trial CG depends on the opponent‘s expected behavior and a player can maximize the outcome by doing the opposite of what the other player does. However, for repeated CG (infinitely repeated in theory; finitely repeated with unknown endpoint in practice), successful alternations, where one player wins the highest payoff in one round and then the other player wins the highest payoff in the next round, is the best strategy to obtain a joint maximum outcome. This type of cooperation corresponds well to the situation where, over time, the well- being of one player depends of the well-being of the other. The need to consider the well-being of the other challenges traditional economic theories, which assume that people act selfishly. In contrast, there is growing experimental evidence that actual behavior is also shaped by factors inconsistent with pure selfishness (e.g., Dufwenberg & Kirchsteiger, 2004; Fehr & Schmidt, 1999; Roth, 1995). The psychology literature also provides evidence for other Abstract Fairness and efficiency are important aspects that influence cooperation in social dilemmas. During a repeated interaction, they have the potential to serve as competing goals for the decision maker. The ability to balance between fairness and efficiency depends, among other things, on available information regarding mutual accountability for the outcomes in an interaction. In this paper, we examine how information regarding mutual interdependencies influences the interplay between fairness and efficiency in repeated Chicken Game. We distinguish between three possible types of fair behavior: mutual cooperation, alternating cooperation, and mutual destruction. Our results show that the first two types of fairness are positively correlated with the availability of social information. In contrast, mutual destructive fairness is not sensitive to the availability of information and is generally avoided. We also find that without information regarding mutual interdependencies, unfairness increases in parallel with efficiency. When social information is available, however, increases in fairness is coupled with a decrease in efficiency, and the best compromise between fairness and efficiency is reached when mutual interdependencies are learned through repeated experiences. We highlight the significance of our results for fair and efficient interaction in repeated social interactions. Keywords: Efficiency; Fairness; Cooperation; Game Theory; Interdependence; Information; Social Interaction Introduction and Background In our daily lives, we constantly face situations in which our well-being and success depends on the actions of others. Whether the interactions occur between individuals or between organizations, there is mutual accountability for the outcomes. For example, the interaction between two toddlers that learn to share a toy by taking turns holds some similarities with the interaction between companies that adopt a competitive brinkmanship pricing policy while trying to gain control over a certain market. If the toddlers are not willing to behave in a fair manner they will both end up screaming and none of them will play with the desired toy. An alternative behavior is that both toddlers decide simultaneously to switch interest to other toys and thus eliminate the conflict. A more mutually beneficial behavior is where the toddlers will share the toy so one can play with